View Full Version : Why would new money dilute existing money?
I just started reading G. Edward Griffin's outstanding book, "The Creature From Jekyll Island: A Second Look At The Federal Reserve". I'm towards the end of Chapter Two in which I read something that has me totally confused. The part where, when newly created money enters into the economy, it dilutes the value of all money.
Huh? I don't get that. I don't understand that at all. Why would that be? Why would new money dilute the value of already existing money? Because wouldn't it just mean that there is MORE money to work with?
07-17-2010, 10:34 PM
The problem is when we start looking at fiat currency as "money" instead of notations of debt obligations.
Consider all modern "money" as stock certificates drawn upon the total value of the national corporation that issues it.
If you didn't know, nations are incorporated entities, their currency's worth is valued in its purchasing power via international trade.
For example, lets assume we have a tiny corporation who's entire value assessment is 1 million dollars, they issue stocks in an IPO for 1 dollar each, they issue 1 million stocks and sell them for the going rate of 1 dollar each, that's what the market bares.
The corporation is now in obligation to its shareholders, the stock certificate is evidence of this debt.
Now lets assume the company needs to raise more liquidity and issues another million stocks, what do you think the market reation will be when another million shares flood the board ?
The stock value will crash, the ratio of buyers to sellers becomes unbalanced, the surge of selling orders crash the stock value.
The notional value of anything is derived from the ratio of buyers VS sellers.
In a nut shell, this is how quantitative easing destroys currency value.
07-17-2010, 11:15 PM
To simply put it, say you have the only apple tree in town, and you picked it clean and you sell apples for a dollar an apple. Things go fine for a couple years until you find out that many of your neighbors have saved seeds from your apples and now have the ability to grow their own apples. Now when you try to sell apples you will find you can no longer charge a dollar. It is all about scarcity. The more there are of anything the lower the value it has.
Thank you for the responses guys. Makes sense now.
07-17-2010, 11:43 PM
After you understand this, then you can benefit immensely by taking advantage of the time between the artificial changes in the value of anything and its return to a real market value.
07-18-2010, 10:14 AM
Another way to look at it, assume that the gold standard is still in place. The amount of gold is fixed (well, sorta) but as new money is dumped, the 'value' of the paper money wanes (dilutes) with respect to the fixed commodity.
After I finish reading this Creature From Jekyll Island Book, I plan on buying and reading the book, "Secrets Of The Temple: How The Federal Reserve Runs The Country". Is that also a good book to read as well?
07-18-2010, 09:10 PM
Sure, read both and let us know what you learn...
The reason it doesn't 'appear' that the value changes is because workers are paid more with each inflation cycle.
You no doubt remember hearing stories from old timers about working for a dollar a day? Of course, no one can
live on that today, you have to earn $25K just to 'make it' these days. Houses don't cost $14K anymore either, but
the house that did cost $14k in 1960, now costs $180K in pieces of paper.
The real problem is that savers take it the shorts. It's foolish to save paper when the return is so low. It's getting to
the point that you have to run out and buy something, anything of value, when you get paid - because in a month
you won't be able to buy it. Retiree's better make wise investment choices or else the mattress money won't work
The wife bought some cloves for an 84 year old lady. She uses them as "eye's" in some dolls she was making. The
lady asked the wife how much they were? "$4 for the box." The lady was 'shocked!' at the price. She probably
never paid more than $0.25 for a box in her day. Inflation (http://www.dailyreckoning.com.au/inflation-steals-past-future/2007/07/23/) creeps in and steals your labor.
You can't inflate gold or silver, unless you find more which requires labor and time; both are governors that
slow the rate of inflation down. A printing press needs only ink and paper, and these days forget that because
computers need only zeros....
07-28-2010, 12:33 PM
What gets scary is if/when comapnies start using money supply figure to help calculate their rates and charges. If Company A Charges $100 for its product/service ad the next year the money supply doubles Company A loses half of its purchasing power. To maintain the same level of purchasing power that product/service provided last year, the new rate would need to be $200. Should company A not raise their rates to do no more then maintain its purhasing ability??? Or should it just keep the rate at half purchasing power and dwindle into oblivion as each year it gets worse.
07-28-2010, 03:28 PM
And the working stiffs and fixed incomes are the last to see the money, so it's lost value by the time they even get into the game. Those who see it first can still buy stuff at the old rates, thus transferring some wealth from the bottom to the top.
I personally like Cathrine Austin Fitts' name for this... The Tapeworm Economy. The top being the feasting parasite.
12-01-2010, 06:52 PM
yeah, that book actually goes into far more detail on this subject. if you read carefully, you should be confused no longer. i read it twice just to be sure.
Thank you for the responses guys. Makes sense now.
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