Публикуется по просьбам трудящихся – скорее всего временно: this is not written by zed244 – it is a translation of the text in Russian at http://www.avanturist.org/blog/post/28 . More of the same author here http://tinyurl.com/43b9pmy (in Russian) – highly recommended.
For those who want a touch of reality – as of 21 of September 2011 – it is here
Quote”..To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less..”
Money Out of Thin Air or Tale About $100 and The Door
Let say we – I, You and Chronoscopist – were on a plane across the Pacific Ocean. While on board, we consumed substantial amount of absinthe, kicked up a row and in the process tore off a door to the toilet. For our noble deeds we were promptly thrown out of the plane via emergency exit. Luckily, next to where we plunged into the water, was a small nameless Polynesian island. After we climbed on its soil, we held a short council and decided to name the island The United States of Absinthe (USA).
Naturally, when we were thrown out of the plane, they forgot to return us our luggage. As the result, all our tangible and intangible assets consisted of the toilet door, which You forgot to leave on the plane and a single $100 note which You discovered in your wallet. Thus all non-financial assets of our USA consist of one toilet door, and all financial, aka “money supply”, of a single $100 note. This is all our country has. Since we have nothing else, it can also be said that our material assets – the toilet door, supports (secures) the money supply of $100. Or, in other words, our door costs $100.
Still under the influence of absinth, we decide that we need to start getting the things organised. The Chronoscopist, proved to be the shrewdest – he announces that he opened a bank and is ready to accept deposits from the island’s population and promises to pay 3% interest annually. You give him your $100 and he writes it under “Liabilities” -> “Deposit Accounts” in his book.
But I am too not just out of the woods – indeed, after so many years I spent investigating economic swindles, I now know how to expropriate your door and your $100. I offer You 5% interest on your $100. I tear off a sheet of paper from my notebook and write “Bond Certificate of USA. Issued for the amount $100 at 5% interest, paid annually”. You feel that You have drawn a full hand. You withdraw your money from the deposit account You have with the disappointed Chronoscopist and give it to me in exchange for my Bond. I take your $100 and immediately deposit it into my account with now smiling Chronoscopist.
Ideally, we could have stopped right here and then, and start doing something real, say, shake the palm tree or try to collect shell fish – to eat our bread in the sweat of our faces, so-to-speak. But you all know that I am indefatigable financial genius, and I am not interested in the petty things such as coconuts and oysters. After a refreshing tour of our island – 50 steps from South to North and 30 from West to East, I invent an ingenuous combination. I approach You and offer You to earn an additional 1% annually. You should take a loan in Chronoscopist’s bank at 4% and use it to buy from me another USA Bond at 5% interest. This second Bond Certificate for $100 I have just written, and now I wave it in front of your nose. Immediately You rush to the bank and borrow $100 there, using my first Bond as a security. The Bank has the money – I put it there on my deposit account. You give me the $100 You have borrowed and put the second USA Security Bond into your wallet. Now You have $200 worth of USA Bonds. I put $100 in the Bank – now I have $200 on my deposit account. Chronoscopist jumps from joy – his credit business is growing up!
Do you really think I am going to stop there? Hold your horses – I have already written a third USA Bond for You. You rush to the Bank to borrow another $100, secured this time with my second Bond. Closer to the night, got tired of running around the island with this single $100 note and having used all pages in my diary to write USA Bonds, we have the following results: You have $5,000 worth of USA Bonds, while I have $5,000 deposited on my account.
Now I feel that this is the right time to expropriate your toilet door. I offer to buy it from You for $100. But You do not want to sell the only toilet door on the island for $100 and ask $1,000. Well, I agree – after all I have $5,000 on my deposit account. I use the last page left in my diary to write a Payment Order to Chronoscopist to transfer $1,000 from my account to yours – and take your door.
If this accounting is given to an American economist, he or she will inform you that our USA had $1,000 in assets in the form of toilet door and $10,000 financial assets in bank deposits and USA Bonds. Which means that our combined wealth increased 110 fold in one day. Well, a less refined and educated observer, might say that we are the three idiots, because by the end of the day we still have nothing but the same one toilet door and $100, and that only complete imbeciles could have spent the whole day tearing sheets out of their diaries to write nonsense, instead of collecting coconuts or shell fish. Who of the two is correct –you, the Reader, should decide yourself.