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Fiat Money, FRB And Currency Standards - Part I (Short Introduction)

|Includes: SPDR Gold Trust ETF (GLD), IAU

Since I don't have time to translate my promised article about FRB (Fractional Reserve Banking) and money/currency systems into English at the moment, here are two first morsels about the high-powered money part of the equation - the one controlled by central banks:

1. Reserve Currency Status Does Not Last Forever

2. FED actions have (mostly unintended) ramifications worldwide

See the current volatility in other currencies:

...currency movements taking place in many countries around the world such as India where the central bank feels helpless at the moment and in Brazil where it appears the central bank has regained some control of the market.

The following chart shows the recent devaluation in the Indian Rupee which is now in free fall against the dollar. The process of capital flows reversing out of the country began the moment when the "taper" was mentioned by Bernanke. Since March of this year, the Indian people have lost 30% of their purchasing power/wealth (those that converted their paper into gold have seen their wealth skyrocket). They have lost 15% in the last 21 trading days and almost 3% in yesterday's trading alone. The speed at which the tides can change for a citizen's savings are mesmerizing.

From India to Mexico and Indonesia, emerging market currencies have been in freefall as the latest FED fiat experiment is drawing to a close. Remember the famous quote from Connally a few decades ago:

Shortly after taking the Treasury post, Connally famously told a group of European finance ministers worried about the export of American inflation that the dollar "is our currency, but your problem."[22]

Again, these were just two morsels on the high-powered money side. I will add an Instablog entry about the deeper problems of FRB later on in part II - that's where most (estimated at 85% below) of the money creation occurs today. As a quick introduction to the topic...

Question: With the Fed "printing" so much money, why has the U.S. not experienced hyperinflation?

Answer: The main thing that confuses people is that the Fed's contribution to the money supply-that is, what I call "state money", which is high-powered money produced by the Federal Reserve-is only about 15% of the total money supply. The other 85% is what's called "bank money" -that's money or deposits created by private banks. What we've had since the fall of 2008, when the crisis started, is the Federal Reserve opened the floodgates and almost tripled the size of its balance sheet and as a result of that, the contribution of state money to the total money supply has gone from 6.5% of the total being produced by the Fed to an amount now equal to about 15%. So, it has increased its contribution enormously, but it's still small potatoes relative to bank money.