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View Full Version : Hey...wait a sec...now that the penny's gone



banquo's_bumble_puppy
2012-Jun-11, 05:49 PM
Hey...wait a sec...now that the penny's gone- where do the dollars go? I mean it takes 100 pennies to "make" a dollar- so if you eliminate X number of pennies....where does whatever backs up those pennies go? This smells fishy somehow.

banquo's_bumble_puppy
2012-Jun-11, 05:58 PM
and if it costs 40 cents to mint a Canadian loon which is supposed to be worth a Canadian dollar....OMG the whole system's....just, just....phoney baloney balloon juice....

NEOWatcher
2012-Jun-11, 06:00 PM
They'll just go back to the same place they magically appeared when the pennies were made.

Yes; there's a more complicated answer. But; in the context of "fishy", I am satisfied with the fact that it goes both ways.

banquo's_bumble_puppy
2012-Jun-11, 06:29 PM
money's not exactly an outdated concept as much as it is a concept that can have different meanings to different people...how do you measure it? what is ascribed to it? gold, silver, a bushel of grain, labor, or all of the above? or nothing at all....money is just an idea...maybe barter is better..

Perikles
2012-Jun-11, 06:33 PM
....money is just an idea...maybe barter is better..Can you explain the difference to me?

Nowhere Man
2012-Jun-11, 11:06 PM
Just think about your direct-deposit paycheck going into your bank account. It's all bits, not even anything physical.

Fred

publius
2012-Jun-11, 11:16 PM
I don't know the nuances of the Canadian monetary system, but in general, it works like all modern monetary systems. In the US, coin is direct Treasury currency (whether that is true for Candadian coin or euro coin, I'm not sure -- it may all be central bank managed in those systems). It is created and spent it into existence by the federal govt. Nothing "backs" it. Now, paper money, Federal Reserve Notes and their digital counterparts, are created by the Federal Reserve, the central bank. All other central banks do the same thing. Technically, what backs the currency is debt, a promise to repay, usually by the sovereign. That is govt bonds "back" the currency (along with a tiny smidge of gold, which is valued not at market prices but a fixed ratio).

Now all that is just accounting games. What really backs a given currency is psychology, the belief that the currency is worth something. That is, the reason money is valuable to you is because you have faith that you can exchange that currency for goods and services.

There is no problem with eliminating the penny. Basically, the money is swapped for some other unit of the currency.

swampyankee
2012-Jun-12, 12:06 AM
Publius has, as far as I can understand hit the eternal basis of all monetary systems: pieces of metal or paper with little intrinsic value (gold? quick -- what non-decorative, pre-20th Century uses existed for gold?) and arbitrary symbols on them which could be exchanged for goods or services, at a value largely mediated by some formal authority.

publius
2012-Jun-12, 12:11 AM
If you want to see what "backs" the US dollar, have a gander at the Fed's balance sheet, H.4.1, which comes out every week (all other central banks are similiar):

http://www.federalreserve.gov/releases/h41/current/h41.htm

Go to Table 1, "Factors Affecting Reserve Balances of...". That is basically the asset side of the Fed's balance sheet, what it is creating currency against. The details are a lot more complicated, and your eyes would probably glaze over and it would take pages of rambling to explain all those details.

Reserve Bank Credit is the paper assets against which the Fed is creating currency. That stands at $2.831T. Of that,
$1.66T is US Treasury bonds, $93B is Fannie and Freddie debt securities, and $852B is mortage backed securities, or paper backed by a bunch of home mortages. And then there's $11B of gold (valued at something around $40/oz), some SDRs (complicated IMF entities).

Me, I'm too lazy to find the equivalent for the Canadian central bank, but it would be similiar.

JustAFriend
2012-Jun-12, 01:05 AM
OMG the whole system's....just, just....phoney baloney balloon juice....

Uhhhh.... yeah. Whatever you do, don't go to work for the stock market, either....

(I worked in the PR department of a brokerage and saw what goes on.)

mike alexander
2012-Jun-13, 12:32 AM
The money in your wallet is a generalized IOU. That's all any money is.

publius
2012-Jun-13, 01:32 AM
Ok, here you go, the Bank of Canda's equivalent of H.4.1, the Statement of Financial Position. You know I criticize our vaunted Helicopter and the boys at the Fed, but they do publish more info and make it easier to find than most central banks.

http://www.bankofcanada.ca/about/corporate-governance/bank-of-canada-statement-financial-position/

This is the latest:

http://www.bankofcanada.ca/wp-content/uploads/2012/06/statement_financial_position_300412.pdf

It is short and sweet compared to H.4.1.

So, for the OP, there is what your central bank is creating Canadian dollars against, roughly $67.7B of Canadia governement debt and a smidge of other loans.

A word about "equity". For a central bank, this doesn't mean what you think it means. It is the difference between the assets it is creating currency against and the currency it has created. This is a cushion for losses. It is basically an accounting buffer.

Helicopter and the boys invented a little trick they called "negative liabilities to the US Treasury" which will absorb any losses and allow them to maintain constant "equity", and allow them to avoid the embarrassment of having the equity go negative if the market value of their assets goes to crap. If that happened then technically you would have unbacked currency out there.

When you're a central bank you can pull tricks like that. It's all psychology pretending to be something real and they come up with tricks to maintain the fiction as need be.