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How does the financial system work?
Topic Started: 4 Oct 2013, 09:35 PM (2,164 Views)
Elastic
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I have decided to start this thread to further my understanding of the financial system but also as a means to create a discussion on the different mechanisms which make up the system.
Forgive me for my limited understanding but I wish to start from scratch and work through different scenarios to gain a full understanding of the system. It seems to me that information about the financial system is shrouded in secrecy and it is difficult to find accurate information on the internet.
I hope that people will be willing to contribute their knowledge as I realise there are many members of this forum with a better understanding than myself and different ideas.
As I said I wish to start from scratch and work through because I believe it is necessary in order to understand the overall system.

Point 1. Formation of a treasury
What happens when a government first forms with the ability to mint its own currency?
When it starts spending money into existence does it keep a corresponding account with the Reserve Bank?
Does it hold some kind of collateral to justify it's money creation such as gold?
Only a rat can win a rat race.

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Veritas
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Elastic
4 Oct 2013, 09:35 PM
I have decided to start this thread to further my understanding of the financial system but also as a means to create a discussion on the different mechanisms which make up the system.
Forgive me for my limited understanding but I wish to start from scratch and work through different scenarios to gain a full understanding of the system. It seems to me that information about the financial system is shrouded in secrecy and it is difficult to find accurate information on the internet.
I hope that people will be willing to contribute their knowledge as I realise there are many members of this forum with a better understanding than myself and different ideas.
As I said I wish to start from scratch and work through because I believe it is necessary in order to understand the overall system.

Point 1. Formation of a treasury
What happens when a government first forms with the ability to mint its own currency?
When it starts spending money into existence does it keep a corresponding account with the Reserve Bank?
Does it hold some kind of collateral to justify it's money creation such as gold?
Question 3 is easy anyway.

No, the money is backed by no physical material but its value or credibility as a currency will be determined by the strength of the economy and political stability of the country issuing it.

EDIT: Should mention that countries can if they so wish contrive to keep the value of their currency artificially low. e.g. China.
Edited by Veritas, 4 Oct 2013, 09:43 PM.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Elastic
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Given that double accounting is the foundation of the financial system is it the case that initially at least, the government prints money with no corresponding liability?
In the US in 1933 where they swapped currency for gold, the goverment held gold as the asset which backed the currency. Is this situation typical for all currencies in the initial phase?
In Australia we were presumably using English currency which initially was imported and used as the local currency but at some point was replaced by local currency.
Only a rat can win a rat race.

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Strindberg
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Elastic
4 Oct 2013, 09:51 PM
Given that double accounting is the foundation of the financial system is it the case that initially at least, the government prints money with no corresponding liability?
The Oz government via the RBA maintains liability for all the currency notes and coins in circulation. I believe it always has.

This liability is not a liability to provide gold or whatever for currency notes. It is a liability to fund the reserve accounts of the commercial banks with which it deals if such currency is returned.

When a bank asks for say $X currency the RBA will deliver it and do the necessary double accounting resulting in a $X debit of that bank's reserve account and the addition of $X to the RBA's currency liability entry on its balance sheet. The result is that both the bank's and RBA's net balances remain unaltered.

If a bank returns $X of currency notes to the RBA the double accounting is simply reversed.

I suppose initially the banks must have given the CB/government something for the currency notes, perhaps gold or silver, but the double accounting would still have been done such that the CB recorded the currency issued as a liability, which was matched by the value of whatever the bank gave the CB/gov. Subsequently the CB/gov could have sold that gold for currency or reserve account money which they could have converted to a ledger dollar account. Hence a fiat system.
Edited by Strindberg, 4 Oct 2013, 11:53 PM.
Housing costs to Income broadly unchanged since 1994 - re-ratified here
The People of Australia have the highest median wealth in the World
2002-2012 10 year house price growth the SLOWEST since 1952-1962
"There are two kinds of people in this world: ones that fiddle around wondering whether a thing's right or wrong and guys like us." (Hugo to Gagin in Ride the Pink Horse)
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Foxy
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Zero is coming...

Elastic
4 Oct 2013, 09:35 PM
I have decided to start this thread to further my understanding of the financial system but also as a means to create a discussion on the different mechanisms which make up the system.
Forgive me for my limited understanding but I wish to start from scratch and work through different scenarios to gain a full understanding of the system. It seems to me that information about the financial system is shrouded in secrecy and it is difficult to find accurate information on the internet.
I hope that people will be willing to contribute their knowledge as I realise there are many members of this forum with a better understanding than myself and different ideas.
As I said I wish to start from scratch and work through because I believe it is necessary in order to understand the overall system.

Point 1. Formation of a treasury
What happens when a government first forms with the ability to mint its own currency?
When it starts spending money into existence does it keep a corresponding account with the Reserve Bank?
Does it hold some kind of collateral to justify it's money creation such as gold?
The economic system is exceptionally simple.
The dumb give all their resources to the smart.
END of STORY
Peter
:pop:
http://www.afr.com/content/dam/images/g/n/2/1/u/8/image.imgtype.afrArticleInline.620x0.png/1456285515560.png
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dumbass
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Elastic
4 Oct 2013, 09:35 PM
I have decided to start this thread to further my understanding of the financial system but also as a means to create a discussion on the different mechanisms which make up the system.
Forgive me for my limited understanding but I wish to start from scratch and work through different scenarios to gain a full understanding of the system. It seems to me that information about the financial system is shrouded in secrecy and it is difficult to find accurate information on the internet.
I hope that people will be willing to contribute their knowledge as I realise there are many members of this forum with a better understanding than myself and different ideas.
As I said I wish to start from scratch and work through because I believe it is necessary in order to understand the overall system.

Point 1. Formation of a treasury
What happens when a government first forms with the ability to mint its own currency?
When it starts spending money into existence does it keep a corresponding account with the Reserve Bank?
Does it hold some kind of collateral to justify it's money creation such as gold?
Money and accounting are as similar as trees and roads.

Your first point involves sovereignty. Look it up.

This is really really important in the money puzzle...there are not many people on the planet that undersatnd money.

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economist
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foxbat101
5 Oct 2013, 12:54 AM
Elastic
4 Oct 2013, 09:35 PM
I have decided to start this thread to further my understanding of the financial system but also as a means to create a discussion on the different mechanisms which make up the system.
Forgive me for my limited understanding but I wish to start from scratch and work through different scenarios to gain a full understanding of the system. It seems to me that information about the financial system is shrouded in secrecy and it is difficult to find accurate information on the internet.
I hope that people will be willing to contribute their knowledge as I realise there are many members of this forum with a better understanding than myself and different ideas.
As I said I wish to start from scratch and work through because I believe it is necessary in order to understand the overall system.

Point 1. Formation of a treasury
What happens when a government first forms with the ability to mint its own currency?
When it starts spending money into existence does it keep a corresponding account with the Reserve Bank?
Does it hold some kind of collateral to justify it's money creation such as gold?
The economic system is exceptionally simple.
The dumb give all their resources to the smart.
END of STORY
Peter
:pop:
Thanks for that I will quote "foxbat" in the Monday morning meeting after which we can all go home and leave our wealth at the door of Bill Gates.


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Foxy
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Zero is coming...

economist
5 Oct 2013, 01:14 AM
Thanks for that I will quote "foxbat" in the Monday morning meeting after which we can all go home and leave our wealth at the door of Bill Gates.

He is going to get it sooner or later.
Peter
:pop:
to be fair to your question, i hope you get to know how this system works, i hope you are successful.
I after 49 years on this planet have no idea how the system works.
Like a washing machine.
I just know if you put your clothes in after 40 minutes they generally come out clean.
The very best of luck.
Peter
:bl:
Edited by Foxy, 5 Oct 2013, 01:23 AM.
http://www.afr.com/content/dam/images/g/n/2/1/u/8/image.imgtype.afrArticleInline.620x0.png/1456285515560.png
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miw
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Strindberg
4 Oct 2013, 11:51 PM
I suppose initially the banks must have given the CB/government something for the currency notes, perhaps gold or silver, but the double accounting would still have been done such that the CB recorded the currency issued as a liability, which was matched by the value of whatever the bank gave the CB/gov. Subsequently the CB/gov could have sold that gold for currency or reserve account money which they could have converted to a ledger dollar account. Hence a fiat system.
Interesting point. This is assuming the whole system started at a time when things were not "full fiat".

How would you start a fiat currency monetary system today? It is very interesting question of bootstrapping.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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Andrew Judd
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miw
5 Oct 2013, 01:25 AM
Interesting point. This is assuming the whole system started at a time when things were not "full fiat".

How would you start a fiat currency monetary system today? It is very interesting question of bootstrapping.
Provided you have the power to put people into prison for failing to collect your tiddlewinks you can issue anything as money.
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