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Ward Williams

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Why would the world or even the US economy crash if we stopped paying back the Federal Reserve?

I need help understanding what I think is basic economics. I'm a simple man so if someone could help me understand in simple language what I'm missing, maybe I could have an intelligent thought about how all this works.

The Federal Reserve (non government entity) creates money out of thin air (fiat money). If that's true, it's really just imaginary money. They loan this money to banks, and governments at interest. This interest is paid to them through interest paid by the end user, if borrowed at a bank, or in the form of taxes when used by the gov?

If the money is imaginary the debt must be too? This seems like a scheme to create a steady income stream for the principles of the Federal Reserve. Why would it cause a crash is we decide to not pay back the interest or even the debt itself? It seems to me that the only people who lose are the people who imagined the money into existence, and the interest with it. Might be a crash for them, but why for the rest of us?

My understanding flawed, or my logic is flawed, or something. I need help with this.

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    Feb 21 2013: The definition of money is a symbol that people will accept as exchange.

    Since a lot of people world wide have confidence in the dollar and will accept it is a lot how the U.S. can get away with spending so much.

    The more that they print the more it dilutes the value of the dollar.

    If they default the credit rating gets changed (admittedly dubious) which means the U.S. has to pay more interest on bonds. This means that the current rate of 250 billion a year to pay interest on debt (bonds) could easily balloon up to 750 billion or 1/3 of the annual revenue

    Since at least a modicum of this money is borrowed from investors the interest rates have to be high enough to get them to invest.

    If you think this scenario is unlikely consider Argentina, USSR, Germany before WW2, Hungary, and about 20 other countries and you will see what happens when the debt is paid by printing money.
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      Feb 21 2013: If we imagine our money into existence, why are we borrowing from someone else? Why don't we just imagine whatever we need, (want)?

      Why do care about credit ratings if we imagine our own money? See above Q. If I could just decide how much money I have, credit ratings are moot.

      Why do we care about investors if we imagine our own money?

      I understand and really have no problem with the whole fiat money thing. What I'm not getting at all is why we are paying a middle man (Federal Reserve) the interest. Money in my world is exchanged for something of value, whatever that means to me. Where's value in what the Fed does?
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        Feb 21 2013: I answered your question look up hyperinflation as that is what WILL happen under your thinking.
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          Feb 21 2013: I'm certainly not advocating anything, nor do I have any "thinking". I'm asking questions. I don't doubt you're right in all respects. Just trying to understand why. Thanks.
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        Feb 22 2013: Let me try this, reality is what people decide/agree reality is. If they decide a certain style is cool that style is cool, if they decide a smart phone is the best then a smart phone is the best, if they agree that gold is valuable than gold is valuable.

        Much of this is determined by supply and demand as illustrated by the aluminum example where it sold for $1200 per kilo in the 1800's but when an inventor came up with a way to make it cheaply the price went down to 18 cents per pound.

        When too much money is printed the value of the dollar goes down and can buy less goods. Gold is now selling for $1600 per ounce 10 years ago it was $400 or so. It is not that gold has gone up that much in value it is that the dollar has gone down that much in value.

        People determine what commodity they have the most confidence in. If the economy collapses they will have more confidence in guns and food.

        Clear as mud?

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