Posts Tagged ‘debt’

A Fiat Money Origin Story

April 3, 2016 13 comments

Nick Rowe has a recent post about Chartalism which got me thinking about the fundamental explanation for the value of money again.  He calls this an “origin story” and seems to be of the opinion that the origin doesn’t really matter, once it gets going you can remove the original source of fundamental value and it just stays up.  Kinda like Wile E. Coyote running off a cliff.  As long as nobody looks down, we’re fine.  I personally think this is nuts.  But I figure, why not try going through the explanation like an “origin story” from primitive commodity money to modern fiat money.  Maybe that will help?  I have mostly tried to avoid all of that because it seems unnecessarily confusing and I usually want to distill the story down to its most fundamental point as much as possible.  However, I think maybe this leaves people too much room to fall back on little misconceptions that are deeply lodged their thinking about this.  So why not start from the beginning and try to hammer out all the points (or most of them) in one try?  For the record, this is not a historical work.  It’s a made-up history that I think is fairly consistent with reality as it unfolded in the western world.  Whether or not the Chinese had some type of script that was linked to taxes thousands of years ago or there were some hunter-gatherers somewhere with a credit-based economy before commodity money became prevalent is not relevant to my point. Read more…


The Fisher Paradox

November 24, 2014 2 comments

There is a bit of a paradox underlying much of monetary economics. If real rates are independent of monetary factors, then a reduction in the nominal rate should be accompanied by a reduction in the expected rate of inflation (or vice-versa). Yet we typically observe, at least in the short run, that if the central bank lowers its interest rate target, it causes a higher rate of inflation. Of course, both old monetarists and market monetarists reconcile this by saying “never reason from a price change” (always good advice) and instead, reason from a change in the money supply (and expected future money supply), assuming sticky prices in the short run and then separate the effects on interest rates into the well-known liquidity, income and Fisher effects which allows for the real rate to change in the short run and for the nominal rate to go either way.

That’s all perfectly reasonable but lately there has been a school of thought emerging known as “neo Fisherites” who are bringing this issue back into the discussion. Nick Rowe (for one) has recently been taking them to task(here, here and here).

Now let me say for starters that I suspect everything Nick says about these papers is correct, and I’m not trying to defend them. I agree that denying that lowering rates raises inflation is contrary to all observations, and I suspect (though I haven’t read them yet) that his analysis of the specific papers as lacking in economic intuition and relying on strange assumptions to “rig” the results in favor of their prior beliefs is most likely spot on. That is how I feel about most modern economic papers I read, sadly. However, I think beneath the snow job and the tiny pebble of wrongness, there is actually a kernel of insight (or at least the pebble started out as a kernel before it got all mangled and turned to the dark side) and it is closely related to the stuff I have been trying to say. So I will try to flesh it out a little bit in a way that does not contradict everything we know about how monetary policy actually works.

Note that this actually began as a discussion of monetary and “fiscal” policy, which I intend to get to but I will put that off for a future post since just dealing with this Fisher paradox will be enough to fill a lengthy post by itself, but keep in mind that adding that piece in will be important for making this model look like the real world. (And also keep in mind that I don’t mean what other people mean when I say “fiscal policy.” Frankly, it’s almost tongue-in-cheek. All macro is monetary.) Read more…

“Negative Money” (A Variation on Nick Rowe)

October 8, 2014 Leave a comment

As I said recently, I have a bunch of outstanding business with Nick Rowe which I am trying to work through. Foremost on the list is a couple of older posts about negative money (Part I, Part II). This comes remarkably close to my way of looking at things, but let me make a couple amendments.

First, let me address another point on which Nick and I agree. Here is one of his comments on a different post.

Start out be assuming One Big Bank, that is both a central bank and a commercial bank. That issues only one type of money. And it does not matter if that money is paper or electrons. Now make an assumption about what the Bank holds constant: is it r, M, or NGDP, or what? Then ask your question.

I believe that one of the main mistakes people make which causes us to miss some important insights is to separate the central bank from the commercial banks and sort of lump the commercial banks in with the rest of the private economy as a facility that simply matches borrowers with lenders or something like that. The commercial banks play a key role in the functioning of the money supply and they have the special privilege, granted by the central bank, of performing this role. So let’s take the opposite approach and lump the commercial banks in with the central bank and treat it as one big bank.

However, instead of having it issue one kind of money, let’s have it issue two kinds: red and green. Anyone who wishes, can go to the bank and ask for some quantity of green dollars and an equal quantity of red dollars (and assume that the bank just keeps track of this in their records, as in Nick’s model, the actual paper currency is not the important thing here.

Then let us make two changes to the model. First, in Nick’s model, either red or green money can be used in exchange. Let us instead assume that only green money can be used. So instead of this.

. . . if neither the buyer nor seller of $10 worth of apples has any money, each goes to the central bank and asks for 5 green and 5 red notes, the buyer gives 5 green notes to the seller, the seller gives 5 red notes to the buyer, and they do the deal.

We would have the buyer going to the bank and getting ten red notes and ten green notes and trading the ten green notes to the seller. Notice that this difference is not particularly meaningful in terms of the model as in both cases the seller ends up with ten green notes and the buyer ends up with ten red notes. This does however, start to look a lot like how things actually work.

Second, in Nick’s model, the interest rates the bank “pays” on each type of note are constrained to be equal. Instead of assuming that, let us assume that the bank can only “pay” interest on red notes and the rate on green notes is constrained at zero. This means that the quantity of red and green notes will not be equal unless one of two things happens.

1. The rate on red notes is zero at all times.

2. Additional green notes are created and somehow distributed to balance out the red notes which are “paid” out as interest.

Now, if this doesn’t look like what really goes on in a modern economy, just replace “red money” with “debt” and “pay” with “charge” and it should start to look familiar.

This causes several things to start making sense. First, we have the whole issue of why, seemingly worthless bits of paper are stubbornly (and stably) valuable. They aren’t just meaningless bits of paper, they represent one half of a debt contract. Behind those pieces of paper is another half–red money, if you will–and a vast infrastructure dedicated to seizing your property if you hold too much “red money” for too long without producing the requisite green money to cancel it out.

Second is the issue of recessions. Once you look at it this way, it is easy (relatively speaking) to see that there are two separate but related “willingnesses” at play here. There is a willingness to hold red money (debt) and there is a willingness to hold green money (money). People hold green money until their marginal liquidity preference is equal to the foregone interest from lending the money or from “investing” in real goods. People hold red money until the interest rate on red money is equal to the marginal rate of substitution between current and future consumption. These are equilibrium conditions so there are a bunch of different ways to express them.  I tackled it more thoroughly in my model. The important thing is that there is red money and green money and people can hold different quantities of each depending on their situation.  If you only see (and your model only includes) one and not the other, you are missing a very important piece of the puzzle.

But since it is possible for the quantities of these two things in circulation to change relative to each other while they are still “convertible” at a 1:1 ratio, the real value of each type can change differently over time. And since the constraints involved in equilibrium involve expectations about these changes over time, those expectations can be wrong. And the important thing to note is that the expectation of the quantity (and therefore the value) of green money that will exist in the future is tied to the quantity of red money people are willing to hold in the future. In order for the quantity of green money to increase, people must hold more red money. If people decide to reduce their holdings of red money, they must “redeem” green money to get rid of it and this will reduce the quantity of green money.

That is, unless number 2 above happens. Number 2 is required in order to have the type of inflation expectations and interest rates that we have amount to a long-run equilibrium. Number 2 is what I meant before when I said “fiscal policy.” This is not exactly what other people mean when they say “fiscal policy” and that got me into a bit of trouble but the thing that I mean is the relevant thing whatever you want to call it.  (I’m still not entirely clear on what everyone else means by “fiscal policy”…)

If people expect some level of inflation which requires the (green) money supply to keep growing at some rate and we come to a point where the quantity of red money refuses to keep growing at a rate which will make that growth rate of green money possible, everything starts to fall apart unless the bank or the government or somebody finds a way to pump more green money in.

There are a lot of ins and outs and what-have-yous wrapped up in the last four paragraphs here but for a more careful treatment, again, see the model.

Why Hyperinflation is Not a Threat II: Debt and Anti-Debt

January 16, 2013 5 comments

Last time I told you that money does not represent a debt from the Federal Reserve and that even if it did, it would not serve as an anchor for the real value of a dollar because the assets of the Fed are also denominated in dollars.  So what does money really represent and what does anchor the real value of a dollar?

In the past, paper money was created by banks.  You could take gold or silver or something of the sort to a bank and they would give you a bank-note which could be redeemed at any time for some quantity of gold or silver or the like in the future.   As long as people generally trusted the health of the bank, they could trade the notes instead of the gold or silver which was somewhat more convenient and also allowed for an “elastic” money supply (I’ll postpone a discussion of that topic).  Originally, the government got involved in money essentially by assuming the same job as a bank.  They would trade dollars for gold and gold for dollars at a given rate.  In this scenario, money represents a debt from the bank or the government to the holder of the note.  The gold or silver or other real good which backed the money is a sort of “anti-debt.”  It is the means by which these debts can be extinguished.

Today, money is not backed by gold or silver or anything in this manner.  The process of money creation is of an altogether different nature. There are a few different ways it is done but they amount to essentially the same thing.

If you buy a government bond, that represents a debt from the government to you.  It is redeemable at a fixed time for a fixed amount of dollars.  The dollars you use to buy the bond do not represent a debt from you to the government.  They represent the means by which the government can extinguish its debt to you.  At the appointed time, the government must produce the requisite amount of dollars to retire your bond or else default on its debt.  The number of dollars required to do this at that time does not depend on variables such as the price level, rate of inflation, real interest rates, GDP, etc..

If you sell a government bond to the Federal reserve, the debt which the government owed you is transferred to the Federal Reserve.  The dollars which the Fed prints and gives to you represent the means by which that debt can be extinguished.  The Fed doesn’t owe you anything, the government owes the dollars to the Fed.  When the bond comes due, the government must either get dollars from taxes or issuing more bonds in order to retire that bond, or, as they normally do, just issue another bond and give it to the Fed, which cuts out the middleman (you).

Alternatively, the Fed can loan to a bank.  When a bank borrows dollars from the Fed, it’s not the Fed that owes the bank, it is the bank that owes the Fed.  The dollars, again, represent the means with which the bank is able to extinguish this debt.  The principle is the same, in either case, the dollar is created and traded for debt.  In both cases, the debt is from someone else to the Fed and the dollar is not the debt but the “anti-debt.”  This is an important distinction between modern fiat money and traditional bank-notes which, at one time were backed by gold or silver.

To see how this provides an anchor for the value of a dollar, we must go a step farther.  If the Fed loans to a bank, that money becomes part of the bank’s reserves.  If you sell a government bond to the Fed, you most likely deposit the money which you get in return in the bank and it becomes part of bank reserves.  Alternatively, you may spend it on something else, but in this case the person to whom you pay the money most likely deposits it and it becomes part of bank reserves.  I can drag this out through as many steps as you please, but the point is that most of this base money will end up as bank reserves.

The money which the Fed creates and which is able to extinguish Federal Reserve debt is the money base.  Some of this ends up in people’s wallets but most of it ends up in bank vaults (or accounts with the Fed which amount to the same thing).  The base money that ends up in bank vaults acts exactly like gold did in the old system.  It is anti-debt.  The banks then issue bank credit on top of this which is debt.  This bank credit takes the form of checking accounts, saving accounts, certificates of deposits and so forth.  If you deposit a $20 bill in the bank and they add $20 to your checking account balance, this is a modern form of bank credit.  It is redeemable at any time at the bank for $20 in cash.  Again, the cash is the anti-debt into which this bank credit is convertible.

And just like people could use bank-notes to transact, we now can use this modern bank credit.  You can go to the store, buy a gallon of milk and pay with a check or a debit card.  At the end of the day, the store will deposit the check with their bank and their bank will settle any balance that arises with your bank by transferring cash, just like in previous times banks would have settled by transferring gold.  So what we typically call “money” and what we use to buy things is made up of both base money (currency) and bank credit.  The bank credit represents a debt of base money from the bank.  The base money is anti-debt opposing some debt with the Federal Reserve.

But not all bank credit is created from depositing currency.  The majority of it is created in opposition to a new debt to the bank.  This process is just like the one described above when the Fed creates base money.  Someone goes to the bank and wants a loan.  The bank may give them a loan in the form of bank credit. Alternatively, the story often goes that the bank lends cash and the borrower spends it and the then whoever they gave it to puts it in their bank and their bank lends some of it as cash and this process continues.  It makes no difference which story you tell.  The result is that bank credit increases the quantity of what we call money beyond the quantity of base money created by the Fed.

This increase in money comes with an increase in debt.  This is the key.  The debt is nominally denominated. In order to pay it off, someone must produce a fixed quantity of dollars.  If they don’t pay their debts, there are usually undesirable consequences.  Usually those consequences involve the loss of some real property.  If you don’t pay your mortgage, the bank takes your house.  If you don’t pay your car loan, they take your car.  If a business doesn’t pay their debts, they go bankrupt and the creditors take their assets.  It is all of these assets securitizing all of the debt which is created in the process of creating our money that provides a real anchor for the value of a dollar.

Maintaining a stable value for the dollar depends on maintaining a balance between the quantity of money and the quantity of debt.  The reason that the hyperinflation scenario described by many Austrians and conservatives, in which people lose confidence in the dollar and stop accepting it and the value plummets, never happens is because people with debt need those dollars to pay off their debt.  They won’t just decide not to take them.  If some people suddenly lost confidence in the dollar and decided not to hold any, those people with debt would be happy to take them off of their hands.  In fact they would compete over those unwanted dollars.  If someone owed $10,000 on their car, and not paying would result in the loss of the car, then they would be willing to trade any possession they own which they value less than the car for $10,000, including some quantity of their labor (or the car for any amount of dollars greater than $10,000).  In this way, all of those assets–the houses, cars, boats, businesses, etc.–which secure all of our debt are “backing” the dollar.  Dollars are convertible into these assets at a fixed rate.  It’s just that this rate varies from person to person, there’s no “car standard” or “house standard” so it’s not obvious to people.

What’s more, the process by which money is created, destroys money when reversed.  In other words, when people pay off their debt, the money supply decreases.  Now here’s the kicker.  Here is M2 (base money plus most forms of bank credit).  Here is total credit market debt owed.  Notice that total debt is about five times the size of M2.  Now consider what would happen if people did the opposite–that is, if people decided that they didn’t want to hold debt any more.  They start deleveraging and the money supply starts to contract.  As this happens the price level starts to fall.  There are different ways to explain it but they amount to the same thing, people compete for the dollars that they need to pay down their debt by offering other goods and services at a more favorable rate.  As the money supply contracts, it gets harder and harder to get the dollars required to pay off debt.  The prices of goods fall but the value of debt remains the same since it is nominally denominated.  Since there is more debt than money, it is impossible for everyone to get out of debt, some people will have to default.  This can result in a mad scramble to get the limited quantity of dollars so as not to be left bankrupt and with no real assets.

This is a deflationary scenario and this is the true danger which constantly hangs over our economy.  This is exactly what started to happen in 2008.  Notice in the graph of total debt, that it begins falling short of the trend right before the recession.  This is why the government stepped in and started throwing borrowed money at the economy to stop the bleeding.  When the private sector isn’t willing to borrow enough to keep the money supply growing fast enough to keep up with (artificial) inflation expectations and hold off this contraction, the government has to do it.  I’m not saying this is desirable or natural or unavoidable.  It’s an artificial problem we have brought on ourselves but if we really want to have any chance of fixing it, we have to understand what’s really going on.  We can’t just complain about the debt and ignore the system that makes it necessary.  If conservatives every got into power and actually tried to balance the budget without completely reforming the monetary and financial system, it would cause a recession that would discredit conservatives and free-market economics for a generation (at least) and probably destroy the Republican party.

Debt and Deflation

September 19, 2012 4 comments

I think I have found a way to make my point about monetary policy and debt fairly simply.  But before I get into that I want to point out why deflation is bad.  First, consider the case in which deflation is not bad.

Bob owns a widget factory.  To make widgets, he hires labor and buys steel.  It takes 1 hr of labor and 1 lb. of steel to make one widget.  labor costs $10/hr. and steel costs $5/lb.  The price of widgets in period 1 is $20.  The factory can produce 1000 widgets per period.  Bob holds real wealth in the form  of a factory.  The factory has real value because of its ability to convert labor and inputs into widgets which have a higher (real) value than the labor and inputs required to produce them.  For simplicity’s sake let’s value the factory at the level of profit for one period (it should be the present value of all future profits but for our purposes, that’s just extra math).  This value will be 1000(20-10-5)=$5000.  And let’s say that Bob uses his income to buy cheeseburgers which cost $10 each.  With this income he can buy 500 cheeseburgers per period.  Bob holds wealth in the form of a factory which has a nominal value equal to $5000 and a real value equal to 500 cheeseburgers or 250 widgets, whichever you prefer.

Now imagine that in period 2, due to monetary causes, the price level falls by a factor of 1/2.  What is the effect on Bob’s wealth?  Well he can still produce 1000 widgets.  The price of the widgets fell to $10 but now the cost of the inputs is only $7.50.  So he only makes $2.50/widget or $2500 total.  But cheeseburgers now cost only $5 so he can still buy 500 cheeseburgers, the same amount as before.  In other words, he is no better or worse off.

This is the kind of scenario that classical economists had in mind when they declared that “money is neutral.”  And this is the kind of scenario that Austrians and other conservatives still have in mind when they proclaim that deflation is nothing to worry about.  Now consider a slightly different situation.

Bob is considering buying a factory (the same factory as above).  In order to do so, he must take out a loan.  The price of the factory is $5000.  The nominal interest rate is 5% and Bob expects prices to rise at a rate of 10%.  To get a loan, Bob must make a down payment of $1000 and put the factory up as collateral.  But this seems like a good deal because in the next period, Bob will owe 4000×1.05=4200, but the (nominal) value of the factory will increase by 10% to 5500.  This means that Bob’s wealth (the difference between the value of the factory and what he owes to the bank) will go from $1000 to $1300, a 30% increase.  Since the price of cheeseburgers only goes up 10%, Bob gets richer in real terms so he will be eager to take out this loan and buy the factory.

Now, again, imagine that prices, instead of rising by 10% fall by 1/2.  This will make the factory only worth $2500.  But Bob still owes $4200.  Cheeseburgers get cheaper but it doesn’t matter because Bob’s wealth didn’t fall by 1/2, it actually became negative.  The Bank will repossess the factory and Bob will be 100 cheeseburgers poorer than he was in the first period due to the down payment which he loses in the process.

Notice that this is essentially what happened in 1929 with investors buying stocks on margin and in 2008 with the housing market.

What I have not done here is show that this is bad on a macro level.  Some may argue that, this is bad for Bob, but his loss is offset by a real gain to his creditor, so this is still nothing to fear on an economy-wide scale.  Again, this would be the case with free money, but it is not the case with our system.  However, I will leave that discussion for another post.  The main point to take away from this is that there are two factors which combine to make deflation problematic.  One is that it must be unexpected.  If Bob expected prices to fall by 1/2, then he would have factored this into his decision and it would have been reflected in the market interest rate.  The other is debt.  When people actually own assets outright, the price level can go up and down without having a major impact on their real wealth.  But when their assets are highly leveraged, they are very susceptible to a fall in the price level because the nominal value of their debts does not fall with the nominal value of their assets.  An understanding of this concept will be important prior to what I want to talk about next.


Misconception #1: Money is Debt

August 22, 2012 Leave a comment

I was going to write a long post about how nobody understands monetary economics, but I’m not moving very fast tonight so instead I will do it as a series.  This way it will keep you coming back for more.  Besides, this is probably the biggest thing that people don’t get, and don’t get that they don’t get.  So take the time to mull it over and the next time you read something about hyperinflation, ask yourself whether you think the author understands the difference explained below.  So without further ado, the first thing that people don’t understand about money.

Misconception #1: Money is debt

Money is not debt.  It is, in fact, the opposite of debt.  There was a time when you could deposit precious metals in a bank and they would give you a bank-note which was a promise to pay you precious metals in return for the note.  At that time money (bank notes) was debt.  Now money is created differently.  The Federal Reserve creates money by “printing” it and buying government debt with it.  The debt must be repaid with the same type of money.  In other words, if you have a dollar, you are not holding a promise by someone else to pay you something, you are holding the right to repay $1 worth of loans.  Money is anti-debt.

The same thing is true if your dollar was created by a lesser bank.  These banks don’t print money, they create bank credit.  They do this through fractional reserve banking.  In other words, they can loan more money than they have on hand.  So if they have 100 Federal Reserve dollars in the vault and the reserve requirement is 10%, then they can support $1000 worth of loans.  So if you want a loan, you go to the bank and say “I want a loan.”  If they say yes, then they assign you an account with, let’s say, $200.  You now have an account worth $200 and you owe the bank $200.  The $200 in your account is capable of extinguishing the debt you owe.  But it can also extinguish other debts.  Because of this you can use it to buy a boat and the boat-maker can use it to pay off his loans.  Of course, then you have to get another $200 from someone else later to pay off your debts.  More on that later.

Categories: Macro/Monetary Theory Tags: ,

Fiat Money

August 26, 2010 Leave a comment

It is common among “real money” types like myself to claim that our currency is not backed by anything.  This is in fact incorrect.  Our currency actually is backed by real assets.  The confusion seems to stem from a misconception about the mechanism by which money is created.  People seem to imagine that the government or the Fed or someone just prints money and releases it into the economy in some sort of Friedman-style helicopter drop.  This is not just a misperception among laymen, it penetrates deep into economic circles and is embodied in many macro models including the Keynesian IS/LM model. 

If the above were true, then it would be true that money is not backed by anything.  It is, I think quite uncertain whether or not a system like this would be sustainable and to my knowledge we’ve never observed one.  What we actually observe is money being printed and loaned out in exchange for a promise to pay later.  The promise to pay later is backed by real assets – the assets of the borrower.  If they can’t pay back the dollars the lender takes their real assets.  In this sense dollars are convertible into the real assets which are put up as collateral for the loans that create the dollars.

In the old days, a dollar was backed by gold.  That meant you could take a dollar to the bank and get a certain fixed amount of gold in exchange for it.  The dollar represented a debt from the bank to you.  Our current system is fundamentally similar except that a dollar represents a debt of real assets from you to the bank.  Everyone who has debt has the ability to escape that debt by acquiring dollars.  In this way the dollars are convertible into real assets but instead of people being contractually allowed to buy a certain amount of gold back from the bank, they are contractually allowed to buy a certain amount of their own assets (house, car, boat, business, etc.) back from the bank. 

This debt is what maintains the value of the currency.  As long as there are always people with debts to pay off, they will always be willing to trade some real assets for dollars because they will be able to use those dollars to pay off their debts (and keep their real assets).  The value of the dollar, to some extent (there are certainly other factors involved) depends on how many dollars are out there compared to how much debt there is. 

You may recall that the process of lending money at a positive nominal interest rate means that under normal conditions there is always more debt than dollars in circulations.  New money has to keep entering the system to retire old debts and this new money creates even larger debts to be paid in the future.  The mechanism to keep money flowing into the economy in larger and larger quantities is to keep lowering interest rates.  When rates hit zero, they can’t get enough money into the economy for everyone to pay off all of their debts.  At this point competition for the existing dollars becomes more fierce and prices fall. 

Now it’s time to consider how this situation might correct itself.  To do this I must elaborate on what I meant by “normal conditions” above.  By this I mean conditions of no (or low) default.  This is because, when people default on their loans it causes money to leak into the economy in the sense that instead of that money being pulled back out, real assets get absorbed.  It may be the case that these assets are then sold for some amount of money which gets pulled back out in that way but this amount must be less than what was actually owed or else the debtor wouldn’t have defaulted in the first place.  So in this way debts get reduced by more than the reduction in the money supply.  Every time someone defaults on a loan, some pressure gets relieved — the debt to dollars ratio gets reduced. 

The phenomenon of default and falling prices is the economy trying to relieve the pressure that builds up due to the creation of money as debt.  If we let prices fall and people default, eventually we would get to a place where things would stabilize, the people who survived would have some money and prices would be low, people would start borrowing again, prices would start to rise and we would begin blowing up another bubble that would bring “prosperity” for anther thirty years or so before bursting again. 

Of course this process would be highly destructive, and many people would be hurt (and a few banks would make fortunes…).  So there is another way to get money out there.  You can have the government borrow it and spend it.  It doesn’t matter what they spend it on, it just has to get out there.  This will prop up prices for the time being.  The problem is that this still creates debt, it just creates collective debt.  If the government could really just print money and spend it, it would actually relieve pressure but they don’t .  They borrow this money as well.  So you just end up putting the problem off for a while and in the process the government gets bigger and bigger.  They own more land, have more employees, and control more of the real wealth in the economy because they had to buy it to prop up prices.  Then eventually all that government debt comes due and the bill falls upon whoever was lucky enough to survive until that point with any wealth. 

The problem cited by bankers when creating the Fed was bank runs.  In other words, they created too much money for the amount of assets they had to back them and this eventually caused them to have to default.  All their solution did was turn the tables.  It created a system where there is too little money in circulation to buy back all of the assets backing up that money.  This means that when it eventually collapses, it’s not them that default, it’s you.