How Money is Created

I've been fascinated and somewhat confused of late by the concept of how money is created. Given certain developments recently involving the Swiss unilaterally instituting an exchange rate ceiling, summarized by Kash over at The Street Light, Canada's horror and dismay what we would do when "currencies go to war", and the general idea about how Canada "creates" money, I thought I'd link to some thoughts on the subject. This does not necessarily clarify much on the matter, but does indicate the Bank of Canada is somewhat of a black box and there is no ultimate online authority I was able to dig up.

Worthwhile: Currency, Interest, and Redeemability

Money as Debt (video)

Wiki: Fractional Reserve Banking

Gilligan's Corner: Canada’s Private Banks have no Reserve Requirements (read the comments too)

Steve Keen: The Roving Cavaliers of Credit

First year macro textbook chapters on money in Canada ch10 and ch11 (PDF)

MacroMania: Fractional Reserve Banking

When trying to get information on the basic functions of the banking system and currencies, I am reminded that the web has a few disagreements, and can make things seem rather complicated.

Busy, Busy, Busy

I am so busy right now its difficult to post regularly but here is what I've been thinking this week.

1) Mohican gives the fall mini-budget a B+ mark for a balanced approach to lowering taxes for individuals, consumers, and corporations. It makes Canada more competitive in an investment sense and helps us all keep more dollars in our pockets. I am a big fan of consumption taxes rather than income taxes so the mini-budget loses marks for the further cut to the GST. I would rather see that money spent on a broader income tax cut. That said, lower taxes are good for everyone.

2) The US Federal Reserve cut rates this week, prompting a broad selloff in the US dollar and a substantial rise in Gold and Oil. I don't see how the US economy is going to avoid a recession given the inflation outlook in the country to the south. Fuel prices alone could be enough to slow the economy into recession given the weak housing market already in place.

3) The Stingy Investor has some great research on various investment techniques and stock picking strategies. I highly recommend reading about them if you are into that sort of thing.

4) The REBGV and FVREB will release statistics on real estate sales, inventory, and prices for October early next week. I'm curious what sort of price action we will see. Clearly the FVREB is leading the march toward a declining market before the REBGV tips. Time will tell.

Fiat Money?

A friend told me about this video so I'm posting it here. I haven't watched it yet but it looks interesting, controversial, and it is strangely (for a video about finances) the most popular video on Google Video.

FYI - I'm not a "gold bug" by any means and I'm not necessarily advocating every point of view postulated in this video but I think it is wise, from time to time, to raise questions about the status quo and think in a historical and critical perspective about our current situation.

Bank of Canada Intervention

OTTAWA, Oct 1 (Reuters) - The Bank of Canada has now injected a total of C$890 million ($899 million) in overnight money into the markets on Monday to lower the overnight interest rate toward the central bank's target and improve liquidity.

Earlier on Monday, the bank injected C$530 million and has now increased that total. The bank intervened regularly in August during a credit crunch, but stayed out of the market from mid-August until late September.

It operates through Special Purchase and Resale Agreements, buying securities with the agreement to sell them back the next business day.

What are "Special purchase and resale agreements (SPRAs)"
Repo-type operations in which the Bank of Canada offers to purchase short-term Government of Canada securities from jobbers (investment dealers) with an agreement to sell them back the next business day. They are initiated by the Bank to prevent the overnight rate from moving above the upper limit of the operating band or to signal a change in the band.

For more information on how the Bank of Canada implements this policy check out these links:

http://www.bankofcanada.ca/en/review/1998/r981b.pdf
http://www.bankofcanada.ca/en/lvts/lvtsmp3.pdf
http://www.bankofcanada.ca/en/financial/lvts_neville.pdf

UPDATE: Reader /Dev/Null sent me a link to this article, which, upon reading made me want to go out and buy canned goods, gold, and ammo.

Credit Crunch

By credit crunch I don't mean some new breakfast cereal or chocolate bar, I mean the sudden unwillingness of people to buy junky mortgage debt thus causing a 'liquidity problem.'

It sure looks like I have missed an interesting week in the markets. My vacation will be nice for a couple more days though so I'll provide more next week. Thanks for that interesting post on construction quality M-, very insightful.

Money - is it what you think?