Why the US Dollar WON'T Collapse | A rebuttal to Mike Maloney and Stefan Molyneux

[Dylan Lawrence Moore]

Recently on Freedomain Radio, Stefan Molyneux interviewed Mike Maloney about the imminent collapse of the US dollar. Maloney predicted that within a year or two, we should see the US dollar collapse and a global financial crisis that will make the 2008 crisis seem like a joke. His evidence for this the "artificially low interest rates" being pushed by the Federal Reserve, and the inevitable bubble that must pop from the Fed allowing money into the financial system too cheaply.

These predictions are based on absolute economic illiteracy on the side of Mike Maloney, and Stefan's agreement shows economic illiteracy from his side as well. In this video, Dylan Moore of the Volitional Science Network and Nima Mahjour of economicsjunkie.com go break down point by point the inaccuracies of the FDR video and why the US dollar isn't showing any signs of collapse.

Some of the points covered:

1. Why the Federal Reserve is NOT a private bank

 

The Federal Reserve

 

Anyone who has read The Creature from Jekyll Island by G. Edward Griffin or spoken with any fan of Ron Paul, they will likely let you know that the Federal Reserve is a private bank owned by private individuals that are paid private profits from the interest paid on national debt by taxpayers. This is simply false. The Federal Reserve is designed like a corporation, and member banks are required to own stock in the Fed in order to be a member (or a bank at all), however 98% of the profits earned by the Fed go straight to the US Treasury. That's ninety-eight percent. I don't know of any private organizations that give 98% of their profits straight to the federal government.

2. Why the Fed DOES NOT "print money".

In an earlier article I wrote about how Quantitative Easing is Not Money Printing that details this. This is a general confusion about the fiscal function that the Federal Reserve plays in exchanging reserves (i.e. cash) for bonds. When the Federal Reserve engages in quantitative easing and purchases treasury bonds for reserves it created out of nowhere, it is a mistake to consider this "printing money".

The difference between a reserve and a treasury bond is matter of interest paid, similar to a checking and savings account at a bank. A checking account pays no or little interest, and a savings account does pay interest. Likewise, reserves pay little or no interest, and treasury bonds do. The proper way to think about reserves and treasury bonds is that they're both money. They are readily exchangeable for the other, the only difference being the interest rate paid. So when the Fed engages in Quantitative Easing, all they're doing is money large amounts of money from savings to checking accounts. It's not printing money, and it's not going to cause hyperinflation. In fact, it's so benign, one has to wonder what the hell the Fed thinks it's going to accomplish by doing it.

3. Why interest rates are not a useful metric for predicting economic stability or lack thereof.

The classical/Austrian viewpoint behind interest rates is that, due to the fractional reserve nature of lending (which is another myth), when the Fed lowers interest rates, it makes access to money cheaper and creates a bubble. This is known as the "business cycle". Thus lowering interest rates is supposed to encourage economic growth.

In reality, interest rates have very little to do with how much money enters the economic system. Loans are made when banks encounter ready and able borrowers, not when they have a certain amount of reserves available (more on this below).

The useful predictor of economic health is net private sector savings, which is the total amount of money left over to the private sector after all the financial assets and liabilities have been summed up. More details about this are gone over in the video.

4. Why the Fed can only "push" interest rates UP, not down

The interest rate chosen by the Fed has nothing to do with market forces. It is an arbitrary policy decision. Because the interbank lending rate for reserves uses the Fed rate as a "floor", the interbank lending market on reserves would naturally fall to 0%. Thus if the Fed gets out of the way and let's the "market forces" do their job, the rate would actually be ZERO. Thus the Fed can only manipulate the rates upward, not downward.

5. The myth of fractional reserve banking

Fractional reserve banking is simply something that doesn't exist. Loans are made when banks encounter ready and able borrowers, not when they have a certain amount of reserves available (more on this below). There is no banker that sits around looking at a computer screen to keep track of how much money in reserves the bank has in order to make loans. The actual causality is backwards. The bank makes loans--and of course, these "loans" are money created out of nowhere, a power it is granted by license of the federal government--and THEN finds reserves to meet regulatory requirements. These reserves can be found by depositors, and if there are not enough deposits, the bank simply goes to the interbank lending market to find the reserves it needs to meet requirements. As a matter of last resort, the every bank has an account at the Federal Reserve which they can draw from in order to meet their reserve requirements.

Thus there is never a shortage of reserves for banks to meet their reserve requirements, and thus the reserves act in no way as a bottle neck for making loans, which is why lowering interest rates doesn't do much to affect banks lending capacity.

6. The myth of the barter theory of money

There is no historical evidence of any size economy relying on a system of barter. All evidence, both historical and modern day study of tribal societies, points to a state origin of money. The implications of this are not academic.

The general story taught by the Austrian camp is that societies created money by discovering the most barter-able item in their community, which eventually became precious metals like gold and silver due to their function utility being useful as money (they don't rust, they're malleable, easily dividable, interchangeable, etc.). At some point, someone came along calling themselves the King or the chief or the state with a group of thugs or soldiers and demanded this currency as tax payments, then used this money to do public sector activities, mainly feeding their soldiers and keeping them in fighting condition.

The real story looks more like this: societies used systems of credit to keep track of resources ("I did you a favor last time, so you do me a favor this time"), and at one point the tribal leader had the great idea to demand taxes in arbitrary units that only he can create. This causes his subjects to become unemployed, as they need to do something to get these arbitrary units (I'll call them "tax tokens") in order to pay their taxes. This is diabolically brilliant. Instead of the King haven't to use his soldiers to take things by force, his subjects (the "private sector") are now willing to bring him goods and services in exchange for his arbitrary tax tokens.

Why this is important: What this means, is that if the King or the state doesn't create the tax tokens, then there is no money in the system to work with. Nima and I explore the implications of this further in the video.

7. Why the Fed is not causing inflation

As was pointed out above, because the Fed isn't actually "printing money", it follows they can't be expanding the money supply that would be required to cause the inflation.

8. Why the evidence points to US dollar NOT CRASHING

Economic crashes are set off by a drop in net private sector savings. Every single US crash (6 depressions and 1 recession) were preceded by federal government surpluses, which caused the net private sector savings to drop to levels that required the private sector to become indebted to itself, which eventually has to be paid back. At some point it cannot be paid back, and the private money extension institutions snap back like a rubber band.

[J.L.W]

So what happens when the Chinese move further and further with the gold backed Petro Yuan and countries no longer have to hold such a large reserve of dollars?

The factual situation at the moment is that the US dollar is backed by nothing, no gold. So other countries, like China, are accepting worthless paper in exchange for real goods. The only reason they are continuing with this ridiculous charade is because they did not have the power to stop it America being so militarily powerful but... where there's a will there's a way. If a gold backed yuan, or bitcoin, or some other currency became more valuable, people would drop the US dollar and it would lose its value. Because it doesn't have any value. It is simply at that point the free market determining the 'true value' of the dollar.

It seems to me inflation would be difficult when dollar are exported so heavily. Lack of money velocity as well.

I heard, unconfirmed but interesting nonetheless, that the financial meltdown was a charade and the real reason was that tanks rolled up too close to China and they stopped trade with the US, so excuses needed to be created. There is not much evidence for this viewpoint but... there is some in the form of the Dry Baltic Index that plunged 92% before the 2008 market crash.

I believe taxation started with the church although I could be wrong on that.

[Dylan Lawrence Moore]

9 hours ago, J.L.W said:

So what happens when the Chinese move further and further with the gold backed Petro Yuan and countries no longer have to hold such a large reserve of dollars?

The dollar has value because it's taxed, not because of gold or petroleum. It gives you access to the US economy. The same is for any other country that doesn't peg it's currency to anything.

What's important is what countries save in, not what they trade for oil. To say that China wants to devalue the US dollar is to say they want to destroy their own assets--they hold a TON of US bonds. That wouldn't make any sense.

 

[J.L.W]

8 hours ago, Dylan Lawrence Moore said:

The dollar has value because it's taxed, not because of gold or petroleum. It gives you access to the US economy. The same is for any other country that doesn't peg it's currency to anything.

What's important is what countries save in, not what they trade for oil. To say that China wants to devalue the US dollar is to say they want to destroy their own assets--they hold a TON of US bonds. That wouldn't make any sense.

Well it depends how big the play is. China, I believe and as I think is evidenced by their domestic policy, has a one track mind towards more power. I agree they do not want to lose those assets, plus money held in American banks, and that is probably a reason why they have not really properly attacked earlier but... if there is something good enough in it for them then they will do it. For instance, if the Yuan were to become the worlds dominant currency then this would be valuable for them. China is fairly closely allied with Russia.

I would not agree that Oil trading currency is secondary to T- Bills and Reserve currency. It is said, I think with good evidence that Libya and Iraq were both attempting to change their currency and, how they trade oil just before "Democracy" was brought to them. Another thing is that the Saudi's threatened the US relatively recently with dumping T- Bills if America allows legal action on 9/11. It only needs a small diplomatic spat for something like this to happen. So long as America is not in the militarily dominant position and they have already lost Turkey to Russia.

I think a lot of people think, and it is easy to assume, that if nothing has changed for a long time then it will not. But big changes in history happen with usually very little awareness of the 'little people'. I.e. no one was prepared for the Soviet Union collapsing, the industrial revolution completely changed peoples lives that had lived in a certain way for generations, the Great Depression, even Brexit and the election of Trump, although not yet complete, are changes that most people were not expecting until the change is on top of them. The first World War was an argument between different monarchs ego's. All those peoples lives changed irrevocably for the whims of a few powerful people.

[ofd]

Quote

Well it depends how big the play is. China, I believe and as I think is evidenced by their domestic policy, has a one track mind towards more power.

In reality there are arbitrageurs who make a profit from price differences. If China were to dump T-bills and sell them at a price difference, it would take milliseconds until they were bought up and sold again.

[Somewhere]

In reality, interest rates have very little to do with how much money enters the economic system. Loans are made when banks encounter ready and able borrowers

Other things being equal, as interest rates fall there will be more ready and able borrowers, increasing the creation of credit. People will borrow more at lower interest rates than they do at high interest rates. Money has a downward sloping demand curve, like most other goods. More projects appear profitable at low interest rates than they do at high interest rates. As interest rates fall, assets with a fixed yield will be bid up using borrowed money.

[Dylan Lawrence Moore]

5 hours ago, Somewhere said:

Other things being equal, as interest rates fall there will be more ready and able borrowers, increasing the creation of credit. People will borrow more at lower interest rates than they do at high interest rates. Money has a downward sloping demand curve, like most other goods. More projects appear profitable at low interest rates than they do at high interest rates. As interest rates fall, assets with a fixed yield will be bid up using borrowed money.

I'm not entirely sure what "other things being equal" means, but I think you mean if the underwriting requirements and regulations don't change. Well, they do. Other things aren't equal. Underwriting standards vary wildly and they act as the gatekeeper for people getting credit.

[Somewhere]

The proper way to think about reserves and treasury bonds is that they're both money. They are readily exchangeable for the other, the only difference being the interest rate paid.

Not so, bond issuance isn't equivalent to an increase in the money supply. If I buy a bond, I'm forgoing the use of my money for a while so that the bond issuer can do something else with it. No increase in the money supply there; the bond is a temporary transfer of money from the bond buyer to the bond seller. The bond is a tradeable asset, certainly, but each time a bond is traded, the next buyer forgoes the use of their money until the maturity date of the bond or until they in turn sell the bond. Still no increase in the money supply. But when a government creates money to buy back a bond, that money is added to the money supply and it will tend to cause prices to rise.

[Dylan Lawrence Moore]

16 minutes ago, Somewhere said:

If I buy a bond, I'm forgoing the use of my money for a while so that the bond issuer can do something else with it.

In the same way I forgo the use of my money when I stick it into a savings account. I have to put it into my checking account before I can write a check or swipe a debit card.

17 minutes ago, Somewhere said:

But when a government creates money to buy back a bond, that money is added to the money supply and it will tend to cause prices to rise.

Unless they turn around and buy back treasuries. Remember, they were holding treasuries in the first place because they weren't using the money. If the Fed turns around and gives them reserves a little early because the Fed offers them a little higher interest rate, does that mean they're going to turn around and spend it everywhere?