Is this a coincidence?"
Hi Jam,
No, I do not think it is a coincidence, but at the same time, it is only macro data. This is the 1 month rate, which is very important but less significant than the 3 month going under 0%.
T bill rates are key to the big picture (in a downturn), because Ts are one of those things big enough not to lie. In other words, not easily influenced by traders.
What does a negative T rate say? That deflation remains the dominant force in play. In my view, it is borderline absurd/impossible to make a case that the currency supply is expanding when people, not only won't or can't borrow, but are wiling to pay a premium (a negative rate) to protect existing capital.
As you know, I think we are feeling the water swell as a large wave of bank failures approaches. The wave is so big that it is hard to know when the swell will crest and break. But once the wave does break, and I think it will, cash could become prohibitively expensive.
As we see today, even Treasury auctions greatly expanded to fund shocking new government spending, are not enough to service our basic demand for cash. This goes to the heart of the deflation argument. If new gov spending is so inflationary, entertain this scenario for a moment: a few billion in daily T auctions meets, let's say, rumors of C or BAC toppling, and the corresponding mad rush to get $10T+ in shaky bank paper through the Treasury window.
Negative rates? Or...
BTW, I am not saying this is the optimum time to move everything to cash, assuming one didn't seize that opportunity at 14K+.
ReplyDeleteJust saying cash is king in the macro picture.
FDR is there any possibility of Dow touching 10-11k again to set up a once in a life time opportunity to short again ??
ReplyDeleteDow touching 6500 is a once ni a life time opportunity for short squeeze.
ReplyDeletehttp://www.federalreserve.gov/boarddocs/rptcongress/annual06/pdf/audits.pdf
ReplyDeleteThe link above is audit of the fed made in 2006...The fed is not private at all. This is just conspiracy theory BS.
http://answers.yahoo.com/question/index?qid=20071211142045AAjANMu
The link will give all the answer on the fed.
That is a terrible link. It gets two votes, and that goes down as 100%.
ReplyDeleteSecondly, they do loan the money at interest. Thirdly, if giving it back is so important, why charge interest at all?
Terrible post
"The link above is audit of the fed made in 2006...The fed is not private at all. This is just conspiracy theory BS."
ReplyDeleteGreat link. It's amazing that the Fed Board of Governors have a $300M budget.
These are the guys who were supposedly created and appointed to do battle with the Federal Reserve banks on behalf of the People.
I honestly don't think Bernanke even realizes his job description was created to FIGHT the Fed, as an appointed representative of the people, not to represent and promote the criminals themselves.
I understand the BoG concept was a sham from the beginning, but it would be nice to use what little figurehead power the people are permitted to muster on behalf of the people themselves, of instead of appointing clueless narcissists who desperately need to be part of the problem. That said, the people who get appointed are hardly accidents.
Keep in mind that the link above to the "audit of the fed" is not an audit of the Fed at all. It is an audit of the Fed Board of Governors. Let's keep it simple....This audit shows $218 million in total assets. The fact that it's in millions and not billions or trillions, tells you this is NOT the Fed's balance sheet.
ReplyDeleteThis is sort of analogous to a mutual fund manager being audited separately from the mutual fund themselves.
"This is sort of analogous to a mutual fund manager being audited separately from the mutual fund themselves."
ReplyDeleteIt's more like aditting the mangers of a small part of the PR budget.
FDR,
ReplyDeleteThis is a bit out there, but I've been suspicious of this for about a year: Do you think it's possible the Fed has been intentionally keeping oil and gold higher to mask deflation? A great headfake?
"This is a bit out there, but I've been suspicious of this for about a year: Do you think it's possible the Fed has been intentionally keeping oil and gold higher to mask deflation?"
ReplyDeleteYes.
The gold market is small and easy to push around,at least for a short time. Oil, not so much, but policy will be coordinated for effect, such as timing of restocking, expanding, or tapping the SPR.
In both cases, one man's "we have to do this if we are patriots" is another man's opportunity to rip people off via advanced knowledge of major market moves.
If the Fed is giving it back to treasury, why don't they just forgive our debts altogether?
ReplyDelete"If the Fed is giving it back to treasury, why don't they just forgive our debts altogether?"
ReplyDeleteGreat question. Same reason the Federal Reserve will sit back and watch the US economy burn to the ground before they adjust one dime of the 11% of our total Federal Budget we pay them interest payments. Interest that is WAY above the market-rate, and for doing absolutely nothing.
They don't even put up the principle, they simply make unbacked accounting entries at Treasury.
Pure crime.
Please see:
http://fdralloveragain.blogspot.com/2009/02/eight-steps-to-freedom.html
FDR wrote: "Great question. Same reason the Federal Reserve will sit back and watch the US economy burn to the ground before they adjust one dime of the 11% of our total Federal Budget we pay them interest payments. Interest that is WAY above the market-rate, and for doing absolutely nothing."
ReplyDeleteYep. All true.
At least, it's been true in the past.
But what's at stake now isn't just the U.S. economy, it's the U.S. as a world power. That's not a power that those behind the Fed will give up lightly. It took many decades to get the U.S. into the position it's in right now. That kind of military and political power doesn't come fast and it doesn't come cheap. What in the world makes you think the guys running the show are going to be willing to throw all that away? So they can get another percentage point or two of return?
Please.
The total picture is much bigger than just the money. After all, money is just a tool. It's not the *only* tool.
Agreed, so the best question is:
ReplyDeleteIs their loyalty to the United States, or to power in general?
A: The rugged independence of the US has been a thorn in their side and a slap in their face since our birth, which was intended to do exactly that.
Not only are these people disloyal to the US, they despise the US.
FDR wrote: "Not only are these people disloyal to the US, they despise the US."
ReplyDeleteThat's exactly right. But now that they *control* the US, it's no longer a thorn in their side.
The US will remain under their control until they no longer control the mass media. Which is another way of saying that they'll remain in control of the US forevermore.
And their loyalty is to power in general, of course. But you cannot argue that their power will *increase* through the destruction of the United States, since the US controls the most powerful military machine in existence (and even if the US weren't top dog by that measure, it's far better to control multiple countries with big military machines than just one).
Conversely, it's obvious on its face that their power will decrease through the destruction of the US, since they'll lose the ability to project military and, as a result, political power.
No sane power monger would willingly destroy his own means of projecting power.
FDR wrote: "What does a negative T rate say? That deflation remains the dominant force in play. In my view, it is borderline absurd/impossible to make a case that the currency supply is expanding when people, not only won't or can't borrow, but are wiling to pay a premium (a negative rate) to protect existing capital."
ReplyDeleteTell me something: how can the currency supply *not* expand when the Fed is engaged in fractional reserve lending to the tune of *$300 billion* in the form of T-bill purchases alone?
Have the deposits in all the fractional reserve banks disappeared? No. Has cash been thrown on the fire? No. Have loans been repaid? Hardly. (They've been defaulted upon, but that doesn't remove currency from the system)
Then the money supply has *not* decreased. And therefore, currency deflation has *not* occurred.
And it won't, because they *only* way to deflate currency is for loans to be paid back. There is no other way it can happen short of a collapse of the US government.
Instead of shrinking the currency supply, the Fed has added a minimum of $300 billion to it.
Sounds like currency inflation to me...
kcb - "the only way to deflate currency is for loans to be paid back".
ReplyDeleteFairly clear that the MAJOR way currency is being destroyed is through default - that is where all the stimulus money is going - to prevent defaults. So your argument is sophomoric.
FDR has been clear on this in numerous postings - that the rate of "burn" as he puts it will vastly outweigh any Fed money creation. That plus the Fed money is NOT money created; it is LOANED money, to be repaid at exorbitant interest.
As an aside, I would like to see other comments from other posters - I personally would not like to see this as a forum for you and FDR to debate.
"Tell me something: how can the currency supply *not* expand when the Fed is engaged in fractional reserve lending to the tune of *$300 billion* in the form of T-bill purchases alone?"
ReplyDeletehttp://fdralloveragain.blogspot.com/2009/01/banker-bailouts-will-never-end.html
kcb said:
ReplyDelete"Tell me something: how can the currency supply *not* expand when the Fed is engaged in fractional reserve lending to the tune of *$300 billion* in the form of T-bill purchases alone?"
Every bit of freshly printed "money" is going to pay bad bets made by the banks to the tune of TRILLIONS of dollars, all the while bank executives continuing to get BILLIONS in bonuses and salaries.
Second, the banks are very unwilling to make new loans, ESPECIALLY relative to the rate at which they loaned in bubble times, because they fell there are not enough "qualified borrowers", or people they can rip off with minimal risk.
Third, the majority of people are unwilling to borrow when they fear for their job, have lost 50% of their retirement, and face the spector of losing any social safety net due to ridiculous government debt paid to bankers.
kcb, have you seen a wheelbarrel full of cash rolling down your street since the Fed started buying treasuries? I haven't.
I could go on, but I am sick of typing.
FDR,
ReplyDeleteGeithner's stumbling, contradictory responses regarding a new world currency seem to state that a new currency is definitely 'on the agenda.' However, if power is the ultimate end game for the Fed, would this not force a power shift away from the US, a debtor nation? Why would the US, and especially the Treasury, be supportive of this move? As always, thanks for your insight.
FDR - What if the Fed is actually owned by some of our New York-based banks? Or the Fed is owned THROUGH these banks?
ReplyDeleteHere's what I'm wondering. Certain banks like JPMorgan and Goldman-Sachs seem to be the chosen financial institutions. GS seems to have gotten inside information while Paulson was Treasury Secretary. Plus we see that $billions of credit default swaps were paid at %100 through AIG to GS. JPM seems to have gotten a sweetheart deal through the FDIC to acquire Wachovia (or was it WaMu?). US Bancorp is another large national bank that seems to have quietly escaped this financial mess.
So I'm wondering - maybe what we see is just the tip of the iceberg. MAYBE GS and JPM are also getting other unseen perks - better capital (free?) from the Fed, while competitor banks are charged usury rates? Are we seeing hostile takeovers BY THE FEDERAL RESERVE under the guise of independent banking institutions like GS and JPM?
Maybe Warren Buffet knows something (or suspects something) the rest of us don't - namely that you don't fight the Fed OR its surrogates.
What do you think FDR? Farfetched?
We shouldn't be supportive of a new currency, it is an affront to the constitution.
ReplyDeleteOur current currency is also unconstitutional private issue, which must be changed to US money.
The key to understanding this is recognizing that the same, tired, worm-eaten monarchical forces behind the current Coup to overthrow the legitimate governing doctrine of the United States, despise the US Constitution and all she stands for. Individual freedom is a direct impediment to inbred banker financial domination of the world. That is why the US was formed, and why they still hate our required form of government.
Geithner’s Toxic-Asset Plan on Slow Track as Values Deteriorate
ReplyDeleteShare | Email | Print | A A A
By James Sterngold
March 27 (Bloomberg) -- The Obama administration’s plan to remove distressed assets from bank balance sheets may take three months to begin operating, risking further deterioration in the value of the securities and driving up rescue costs.
No matter how well the plan is designed, delays could mean that prices for mortgage-related assets will drop, requiring banks to take bigger writedowns and seek additional capital from the government, said Christopher Whalen, senior vice president and managing director of Torrance, California-based Institutional Risk Analytics.
Full story: http://www.bloomberg.com/apps/news?pid=20601087&sid=agEBuyNoFyvI&refer=home
I often hear you say that the only remaining company in the dow is GE and the rest have "gone broke or been kicked out".
ReplyDeleteWhat is your take on this - the following was taken from Wikipedia:
"The DJIA was founded on May 26, 1896, and represented the average of twelve stocks from important American industries. Twelve years earlier, Mr. Dow´s initial stock average, containing 9 railroads and 2 Industrial stocks appeared in the Customer`s Afternoon Letter a daily two-page financial news bulletin, that was the precursor of Wall Street Journal. Of those original twelve now, no longer railroad, but purely industrial stocks, only General Electric is currently part of the index.[2] The other eleven were:[3]
American Cotton Oil Company, distant ancestor of Bestfoods, now part of Unilever
American Sugar Company, now Domino Foods, Inc.
American Tobacco Company, broken up in 1911 antitrust action
Chicago Gas Company, bought by Peoples Gas Light in 1897 (now an operating subsidiary of Integrys Energy Group, Inc.)
Distilling & Cattle Feeding Company, now Millennium Chemicals, a division of LyondellBasell
Laclede Gas Light Company, still in operation as The Laclede Group, removed from the Dow Jones Industrial Average in 1899
National Lead Company, now NL Industries, removed from the Dow Jones Industrial Average in 1916
North American Company, (Edison) electric company broken up in the 1940s
Tennessee Coal, Iron and Railroad Company in Birmingham, Alabama, bought by U.S. Steel in 1907
U.S. Leather Company, dissolved 1952
United States Rubber Company, changed its name to Uniroyal in 1961, merged private with B.F. Goodrich in 1986, bought by Michelin in 1990."
Thanks.
"I often hear you say that the only remaining company in the dow is GE and the rest have "gone broke or been kicked out"."
ReplyDeleteHi, Lot's of companies have been kicked out of the Dow for bad performance but have not gone broke, AIG for example.
Jayhawk1 said- “FDR - What if the Fed is actually owned by some of our New York-based banks? Or the Fed is owned THROUGH these banks?
ReplyDeleteHere's what I'm wondering. Certain banks like JPMorgan and Goldman-Sachs seem to be the chosen financial institutions.”
JP Morgan is one of the fathers of the Federal Reserve. The Federal Reserve System was conceived at a private resort owned by none other than JP Morgan. Conceived by whom?
1. Nelson W Aldrich- Republican Senate Member. Business associate of JP Morgan, father-in-law to John D. Rockefeller Jr.
2. Benjamin Strong- Head of JP Morgan’s Bankers Trust Company (Benjamin was to become the first governor of the Federal Reserve Bank of New York, which he quickly led to dominance over the system).
3. Henry P. Davison- Senior partner of the JP Morgan Company.
4. Charles D. Norton- President of JP Morgan’s First National Bank of New York.
5. Frank A. Vanderlip- President of the National City Bank of New York.
6. Paul M. Warburg- A partner in Kuhn, Loeb & Company, representative of the Rothschild banking dynasty.
7. Abraham Piatt Andrew- Assistant Secretary of the US Treasury.
Jayhawk1 said- “JPM seems to have gotten a sweetheart deal through the FDIC to acquire Wachovia (or was it WaMu?).”
It was wamu, but don’t forget the hostile takeover of Bear Sterns, also executed for the benefit of JP Morgan. Possibly a result of a replay of the 1907 panic that was initiated by JP Morgan:
http://www.globalresearch.ca/index.php?context=va&aid=8974
It is becoming pretty clear that JP Morgan stole wamu:
http://www.wamucoup.com/
A detailed look:
http://www.wamustory.com/
They will not let JP Morgan fail. As far as GS is concerned, I think GS just had the right people in the right places (like the head of the treasury for crying out loud). It probably doesn’t hurt now that GS was the second largest donor to the Obama campaign (and the fourth largest to the McCain campaign, possibly hedging their bets?).
http://en.wikipedia.org/wiki/Goldman_Sachs
A call to action for the revolution you have talked about FDR. The attached link is to a Thomas Paine you-tube. It has been reported that Bob Basso (Thomas Paine in video) has been 'summoned' to White House - Obama concerned about the message so who knows how long it will be around before repressed.
ReplyDeletehttp://www.youtube.com/watch?v=jeYscnFpEyA&feature=player_embedded
Thank you sweetft5 for the info - apparently the sinister subterfuge of our governmnent and financial institutions can only be approximated by imagining the most evil, selfish personal motives.
ReplyDeleteA number of you have said that the reason we aren't seeing currency inflation is that the printed money (which is really just more fractional reserve loans) is being used to cover defaults, bad bets, etc.
ReplyDeleteNow, could one of you explain how bad bets and defaults cause currency deflation? Because I don't see how they do.
Here's why: suppose a fractional reserve bank makes a loan to someone. That someone receives money from the loan. Now suppose that person converts that money to cash and runs off with it, and defaults on the loan.
Because it's a fractional reserve loan, the total amount of cash in the system is now increased. The fact that the person defaulted on the loan means that the bank has to take the asset the loan was made against and attempt to sell it. The amount of money they make from the sale is used to recover the loan, to pay it back.
If the asset sells for at least as much as the outstanding balance of the loan (which in this case, because the deadbeat paid nothing back, is the original amount of the loan -- he just took the cash and ran, remember?), then the loan is paid back in full. And payment of a loan is the mechanism in a fractional reserve system by which money is removed from the system. Any money left over is profit and is added to the bank's reserve. So the total amount of money in the system is, at a minimum, the same as the amount of money prior to this loan being made. It could be more if there's profit from the sale, depending on where that profit came from.
But what if the asset is deflating? Ah, in this case, the loan is *not* paid back in full. There remains a balance that the bank then has to write off. But writing it off is just a bookkeeping entry. The money written off isn't taken from deposits, it's just "gone". But is it *really* gone?
No. Why? BECAUSE THE PERSON WHO RECEIVED THE LOAN MONEY STILL HAS IT.
Bam! We now have currency inflation, because the total amount of currency in the system (deposits plus cash) is greater now than it was before, EVEN AFTER SALE OF THE ASSET.
Now, for the claim you people are making to be true, that there's no currency inflation due to defaults and bad bets, there must be a flaw in the above analysis, some mechanism that causes the defaults and bad bets to remove currency from the system without involving repayment of loans. So: where/what is it?
Anonymous said: "Third, the majority of people are unwilling to borrow when they fear for their job, have lost 50% of their retirement, and face the spector of losing any social safety net due to ridiculous government debt paid to bankers."
ReplyDeleteCorrect.
But there's a difference between "less inflation" (due to fewer loans being made) and "deflation" (due to loans being paid back). Since money is being printed to cover the "losses" (difference between selling price of the assets and the amount of the original loans), the total amount of money in the system is certainly not decreasing -- the printed money is being used to "pay off" loans, which means the net change in the money in circulation is zero -- and that's only if *all* the printed money is being used to pay off bad debt. It's not -- much is going towards bonuses, etc., so *that* money remains in circulation.
The reason I haven't seen wheelbarrows of money going down my street is that I don't live in the areas of New York that these banker guys receiving all this money do. Look there, and you will find lots of wheelbarrows.
Here's another thought experiment to illustrate what I'm talking about with respect to currency deflation and inflation.
ReplyDeleteSuppose we have a number of fractional reserve banks, as most modern countries have, and a number of people, also as most modern countries have. Suppose every person each takes out as large a loan as they can.
Suppose further that the total amount of the loans hits the fractional reserve limit.
Now suppose each person who took out a loan converts it into cash, puts the cash into the mattress, and then defaults on the loan. The banks take possession of the assets that were used as collateral and try to sell them. But suppose that all the people, with all their cash, refuse to buy those assets.
The banks can't sell the assets (everyone holds onto their cash), so let's suppose they have to value the assets at zero. They write the loans off, those loans are recorded on the books as a reserve reduction against the deposits on file and thus reduce the amount of money they can lend. In fact, it reduces it to zero. So the banks can't lend any more money, and they all go out of business.
Is there net currency deflation in the above?
Not that I can see. Everyone still has the cash in their mattresses. What was lost were the original deposits that were used as reserves for the loans, but that's a small fraction of the total cash now out there.
How is what we're going through now different than the above, such that we would be experiencing currency deflation while what was experienced in the above hypothetical scenario was massive currency inflation?
In reply to KCB.
ReplyDelete"Now, for the claim you people are making to be true, that there's no currency inflation due to defaults and bad bets, there must be a flaw in the above analysis, some mechanism that causes the defaults and bad bets to remove currency from the system without involving repayment of loans. So: where/what is it?"
January 1, 2007. Bank A bets with Bank B that housing prices will have come down for at least 10 % (calculated from now on) by end 2008. If after those 24 months housing prices have decreased for at least those 10 %, Bank A gets a fixed amount of 100 millions of dollars of Bank B. The same applies to the contrary if housing prices won't have decreased at least 10 % at the end of the period. Then Bank B would receive those 100 millions from Bank A.
End 2007. Housing prices have come back 6 %.
As Bank A is very sure of its prognosis and its calculation models, it assesses the propability of winning the bet at 75 %. On its balance sheet, bank A therefore values its rights out of the bet against Bank B at 50 millions dollars. At the end of the fiscal year, those 50 millions increase Bank A's annual profits.
But what with regard to Bank B? One would suspect that the bet had caused a loss of 50 millions of dollars to Bank B, right? Well, surprise! Bank B uses different prognosing- and valuation models than those Bank A uses. In fact, bank B is quite optimistic housing prices will rise again very soon and calculates the odds of winning the bet at even. Therefore, it does book neither additional profit nor loss on its balance sheet.
BREAK. Here comes the astonishing lesson to be learnt. Although both banks have acted in accordance with valid accountancy rules, the banks' total assets, when added up, have increased by 50 millions - millions 'out of thin air' and only due to different valuation models, although no new money/currency has been printed!
So, at the end of fiscal year 2007, there is a virtual increase of the amount of currency in the SYSTEM of 50 millions of dollars!
Well, guess what happens next? During 2008, housing prices decline further, and by the end of 2008, they have declined more than 10 %.
Bank A receives 100 millions of cash from bank B, which means that Bank A can book an additional profit of 50 millions for 2008.
Bank B has to pay 100 millions to compensate Bank A and has to book an according loss of 100 millions.
We see that now, the total amount of currency in the system has decreased again, for 50 millions, and come back to the niveau of begin 2007 once more.
CONCLUSION?
Well, the conclusion is that everything depends on the time-frame. If you look at the development of the amount of currency in the SYSTEM from begin 2007 to end 2008, all in all nothing has changed. However: if you look at it year per year, you will realize that during 2008, the amount of currency has actually decreased significantly.
In my (very simplified) example, I have chosen a very short two-year period for the bet. However, imagine that hundreds of banks around the world have made hundreds of thousands similar bets as the one described, but with regard to much higher amounts of money, and most importantly, with a much longer 'life'-time. As it is a fact that banks use different valuation and accounting models, it now becomes obvious that the world has seen an enormous and artificial increase of (virtual) currency over at least the last decade. Now, however, that more and more bets reach the end of their lifetime and at the same time develop in the way most of the banks have not expected (='turn bad'), this increase will automatically be corrected and brought to the niveau before the virtual currency increase on the major scale started.
Funnily, there is NOTHING to do about it. I hope this explains why bets going bad decrease the amount of currency in the system.
But asset valuation and *currency* aren't the same thing! Asset valuation is an item on a balance sheet. It doesn't have any real value until the asset is sold: exchanged for money. In other words, it has *indirect* value in terms of currency.
ReplyDeleteCurrency itself is the direct medium of exchange used by the society in question. The amount in existence is the sum of deposits plus the amount of physical cash in circulation. In normal times, it is created when a loan is made and destroyed when the loan is paid back. The only other way to destroy it is for a fractional reserve institution to disappear without paying out all its deposits first. During the Great Depression, that's exactly what happened to a lot of banks, and the end result was massive currency deflation.
So the flaw in your example is the 50 million dollar valuation of the bet. The fact that it's put on the balance sheet means *nothing* with respect to the total amount of currency in the system, because a bet valuation is not itself currency: it does not appear as a deposit nor is it cash on hand.
This is critical: an asset IS NOT THE SAME as currency!
If you tell me that we are experiencing price deflation (which means that the value of assets as denominated in the prescribed currency is decreasing), I'll agree with you all day long.
That is *not* the same as currency deflation! Currency deflation literally means that money is being removed from the system. And unless I'm mistaken, the *only* way that can happen in a fractional reserve system is for a loan to be paid back with cash.
So unless that 50 million dollars appears as a deposit, it can't be counted as currency. If it *does* appear as a deposit, then from what loan did it originate?
kcb, you are almost right, except that assets are used as collaterals to create more currency. When asset value contracts, money gets called back.
ReplyDeleteAnonymous wrote: "When asset value contracts, money gets called back."
ReplyDeleteCalled back from whom?
Not the depositors -- their accounts are untouched.
And if it's not from the depositors, and not from the circulating cash, then it can't be from the currency supply -- because that's *defined* as the sum of those two things and those two things alone.
There's a difference between a bookkeeping entry that says that the asset lost money and an actual reduction in the total amount of money in the form of deposits. For the latter to happen, someone must use their deposits to pay off a loan.
Now, the contracting value of an asset may reduce the stated reserves against which the bank may issue loans, and thus reduce the total amount in the way of loans that it can have outstanding, but that is *inflation reduction*, not *deflation*. It represents a slowing of the growth of the money supply. It does *not* represent a *reduction* of the money supply.
See the difference?
I can see that if the total amount of loans a bank has outstanding manages to exceed the amount it's allowed to have as a result of the reduction of value of assets it has on its books, then the bank would obviously be in big trouble. That probably makes the bank insolvent by definition, if it can't somehow come up with the necessary funds to cover the difference.
ReplyDeleteAnd during the time of the Great Depression, that would have been a huge problem.
But today we have the FDIC. If a bank goes insolvent, the FDIC takes it over and makes its depository operations solvent by fiat -- by injecting money into it. Right now the FDIC is operating on money it has previously gathered through insurance payments but I expect it will soon have to tap directly into the treasury.
So if the FDIC fails, it means that the U.S. government has failed utterly, and you'll have just as much luck getting your treasuries paid back as you would getting your money from an FDIC-insured bank account: none.
Either way, your money will be gone.
And *then* we'll see currency deflation.
That's the scenario FDR is predicting will not happen, because he's an optimist! :-D
Frankly, I'm not expecting that scenario to happen either, because it means the people running the Fed have decided to give up the ability to project power around the world that the U.S. military gives them.
"Now, the contracting value of an asset may reduce the stated reserves against which the bank may issue loans, and thus reduce the total amount in the way of loans that it can have outstanding, but that is *inflation reduction*, not *deflation*. It represents a slowing of the growth of the money supply. It does *not* represent a *reduction* of the money supply."
ReplyDeleteAccording to your own argument, the oustanding amount of loans represents current size of the money supply. When the oustanding amount of loans is reduced, logically it translates to a reduction in current size of money supply, otherwise known as deflation.
Anonymous wrote: "According to your own argument, the oustanding amount of loans represents current size of the money supply. When the oustanding amount of loans is reduced, logically it translates to a reduction in current size of money supply, otherwise known as deflation."
ReplyDeleteWell, not quite. The current size of the money supply is mainly *generated* by loans, but that's not the same thing as saying that the money supply *is* the loans.
The loan itself consists of three things: the money paid out to the borrower, the asset used for collateral, and the bookkeeping entry recorded at the bank.
Of those three things, only the first (the money paid out to the borrower) is used in computing the size of the money supply.
Why? Because even if the other two things disappear completely, the first is *still there*. It's only when money is used to pay back a loan that it is removed from the money supply.
So a default does *not* reduce the size of the money supply except through sale of the asset used for collateral. Why? Because when the sale occurs, *money* is transferred to the bank through the sale and the bank removes it from circulation, up to the value of the loan (if the asset sells for more, I suspect the difference remains in the money supply because the bank can record it as its own deposit).
When money is printed to cover a bad loan, there is *no net reduction* in the total amount of money in circulation. Instead, the money in circulation remains the same, because in this case the money was printed and then immediately removed from circulation (which is what happens when the loan is paid off).
So: except when money is paid out through loans or when money *already in circulation* is used to pay back loans, THE MONEY SUPPLY IS CONSERVED.
There is one, and *only* one, exception to that: when a fractional reserve institution dies and takes its deposits with it. The deposits literally disappear, and the money supply is reduced by the total amount of those deposits. That's exactly what happened during the Great Depression, and is exactly why the FDIC exists.
With the existence of the FDIC, we *cannot* see a contraction in the money supply due to banks failing unless the U.S. government itself fails to fund the FDIC, and if that happens then you can be sure the U.S. government will be unable to pay for anything at all. At that point the dollar will almost certainly be entirely worthless.