The "Fall" is easy to understand:
When strictly-for-profit private banks, like our privately held Federal Reserve System, print, then lend the American people new currency, it floods our economy with spending cash. This means loads of freshly printed paper dollars (not to be confused with money) must compete with existing paper, driving prices higher. This is known as Inflation, an expansion of the currency supply; existing dollars buy less and less as prices rise.
The idea behind inflation is for bankers to profit at the expense of the American worker by:
1. Printing (legally counterfeiting) up to 40x more currency than they have moneyIn addition to commercial lending, politicians quickly volunteer their constituents' credit, and request the maximum credit line that the banks will support so that they may buy votes with the new currency. They lay the payments on children they will never see and utterly do not care about. This goes for both Republicans and Democrats, their desire to borrow and spend is in direct proportion to their stupidity in thinking that "borrowed cash" is tantamount to "free" money. Most of our politicians are simply too dumb to comprehend what a "loan" is, thus their term "spending" instead of "borrowing." This is why for-profit bankers support/contribute/bribe political campaigns in inverse proportion to the politician's intelligence.
2. Lending (legally laundering) it to third parties who are genuinely creditworthy; people who can pay them back, plus interest
3. Collecting about 40x more interest than they should collect, on what is, technically, nothing
The net effect of the group stupidity is rising prices, an "inflation tax" levied for the direct and exclusive profit of bankers and bribed politicians. The value of the U.S. dollar has been steadily plummeting since the private Federal Reserve bank system was put in place in 1913, as connected central bankers systemically steal American wealth via the act of government-condoned counterfeiting. It is worth noting that from 1836 to 1913 we had no central bank, and the inflation rate over the entire period was 0%.
As a pathetic side note, today we have the precise situation our Constitution was designed to prevent, and does prevent, but career politicians and bankers systemically break the law. The U.S. Constitution absolutely forbids printing more cash than you have money, by ingeniously requiring Congress alone (not banks) to coin all US currency, and back 100% of it with precious metals (defined as gold, silver, and later copper) in the Coinage Act of 1792.
The "Rise" of the American dollar is not as intuitive:
After the U.S. (which = world) economy is awash in phony, unbacked paper dollars loaned at interest, all the loans actually have to be paid back or go into default. While the credit ponzi scheme still has room to expand, new credit naturally springs from old in typical pyramid fashion, assuming valid future earnings haven't already been exhausted.
The key to identifying the impending collapse of the phony cash pyramid is to identify the exhaustion of genuine credit (see #2, above).
They key to understanding why credit exhaustion implodes the system is to understand the difference between "spending" and "borrowing." The essence of the difference is that a borrower spends future earnings. This future production capacity is the true source of the cash inflow that bankers sell to create and profit handsomely from Inflation.
It should be clear by now that falling employment is the death knell of the bankers' profit pyramid scheme. The more employment (more accurately, equivalent employment) falls, the more it falls further, and that is the source of Deflation, or a reduction/implosion of genuine creditworthiness.
Why does Deflation skyrocket the value of the dollar while the "system" of corrupt, systemic crime crumbles? Simple: printed cash evaporates due to inability to find an expanding number creditworthy borrowers to support the pyramid. The weight of the required interest payments falls on fewer and fewer working people. Loans go bad which means, at best, fewer borrowers, or implosion of the lenders themselves.
Spending currency dries up. Existing cash dwindles. Prices fall. Surviving dollars buy more and more and more; they get stronger and stronger and stronger. The stronger the dollar gets, the more collateral prices tumble; the more people who cannot support existing credit; the more lending deteriorates; the more the cash supply shrinks; the more prices fall; the more surviving dollars rise in buying power.
Great post. Now i understand how the dollar can get stronger with the printing press in overdrive
ReplyDeleteI think all of what you wrote is correct. Except for this:
ReplyDelete"Spending currency dries up. Existing cash dwindles. Prices fall."
If existing cash dwindles, where does it go? It doesn't disappear except when loans are repaid. Loans which are defaulted upon do *not* cause currency deflation because the lendee still has the money (or, more likely, the people he paid with it have the money. Which is to say, it's in circulation).
If banks fail *and take their deposits with them* then you'll see really big deflation. Until we start seeing that, deflation is going to be limited more or less by how quickly people can pay off their debts. And guess what? People who are unemployed don't pay off their debts.
So what, *specifically*, is the mechanism behind the money disappearing that *doesn't* involve someone paying off a loan?
I think I know some of the answer to that: it goes, in large part, to people who tend to *not* spend it. Namely, the insanely rich. People who, due to the very fact that they're hugely wealthy, spend much less than they make.
Like the people who got all those huge bonuses from the bailout money.
Since the money they have on hand isn't *really* in circulation, the amount of money actually chasing goods and services drops, just like you say, and the end result is lower prices.
And, of course, lower prices arise as a result of people spending less money, either because they have less to spend or because they're reluctant to spend it. From the point of view of prices it's all the same.
But don't expect this time around to be just like the Great Depression, where lots of banks went out of business and took the deposit accounts with them. This time it'll be different. Each time around the bush is different from the last, because if history actually repeated itself, then there really would be a huge advantage from learning from it -- something that even the disadvantaged can do. And that, of course, can't be allowed.
Oh, and by the way: welcome back. It's a huge relief to see that you're still with us. Though I may disagree with you on a few key points, I nevertheless agree with you on most of them, and have a lot of respect for you regardless of how much I may agree or disagree.
"So what, *specifically*, is the mechanism behind the money disappearing that *doesn't* involve someone paying off a loan?"
ReplyDeleteGreat question. The real "bottom line" is that the default kills the bank asset, not necessarily all of the original cash issued. This curtails future bank lending and destroys the existing credit of the borrower. So it is a lever shortener.
It also reduces seemingly unaffected asset prices more directly, as fire sale prices ensue during liquidation.
Let's take a foreclosure as an example, but the mechanics apply to any levered market.
Let's say a bank has $100K in tangible deposits, so it writes 40 loans at $100K apiece. Let's keep the rate at 5% for each to make it easy, it pays 5% on the deposit and it takes in 5% x 40 on the leverage; so the net cash flow is 195%, annually, on the tangible $100K the bank really owns, or $195K per year.
But what happens if one laon defaults? At least three deflationary effects take hold:
One, is that particular $100K asset on the bank's books is cut down, let's say they recover $50K, which is probably optimistic. Now their net profit is only 145K per year. A big difference for only 1 default in 40.
Two, is that bank appetite for leverage will decline. This affects all banks. So now instead of printing 40:1, maybe they can only extend 30:1, meaning the pyramid ponzi won't produce the same cash flow as performing loans are repaid. The banks own credit (future earnings now top at 30 x 5% or $150K annually) is reduced. Subtract defaults, and the writing is on the wall.
Third, is the most devastating, but invisible ("undiscovered" in bank-speak). That is, the performing loans are ALL short on collateral. This is because the defaults in the neighborhood reduce the price of every home. Thus, the 39 remaining occupied homes on the banks books are not worth $3.9M total anymore, maybe they are worth $3.0M. Now every loan recipient is underwater, causing a cascade of defaults as those who must move can't repay the bank.
It doesn't take long for the bank to go bust.
So to answer your question, specifically, even if the printed cash continues to circulate, the continued existence of the asset (the now-empty home) remains dilutive.
So let's assume all credit waned because community unemployment went to 100%. The community would have 40 homes to weigh against only $100K of original deposits after bank liquidation, for a final resting price of price of $2.5K per home.
Oversimplified, but you see the problem when leverage goes poof.
Great answer, FDR. Makes sense, and is roughly what I figured.
ReplyDeleteIn essence what you're saying here is that most of the deflation is the result of decreased demand for the assets and other goods and services as those who lack available money aren't buying and those who do have money aren't buying in the proportion to the amount of money they have as they had been previously. And furthermore, they aren't taking out much in the way of loans, so they are in essence putting on the brakes on the primary inflation mechanism.
I think it's important to point out, however, that there is a difference between "deflation" and "less inflation". If banks are unable to lend the same amount of money as they had before, that places a constraint on the amount of inflation they can inject into the system. That is very different from saying that their inability to lend actually reduces the currency supply. It reduces the *potential* money supply in the future, but it doesn't reduce the *actual* money supply in the present. The act of repaying loans and the distribution of wealth towards the wealthy do that.
Some of the things you referred to aren't playing out (yet, at least) the way you describe. For instance, while the actual sale value of houses is dropping, the values assigned to the collateral by the banks and the banking system are *not* dropping. The effect is twofold: first, the banks are "allowed" to lend an artificially high amount, and second, the banks have reduced incentive to sell the collateral assets on the open market, since that *would* force them to place the real value of the asset on the balance sheet and thus reduce the amount of money they can potentially lend. This is all, of course, an accounting trick and doesn't reflect reality, but the bottom line is that the amount of money the bank can lend is determined by *arbitrary rules*, not by *reality*. And as we've seen, the people who run the system are perfectly willing to change the rules in order to make the system appear "healthy" in any way.
Remember the bank bailouts? Some of the money went to pay executive bonuses and such. That, of course, is directly inflationary to the degree that the recipients actually spend it, but the rest of the money (the majority of it) didn't go towards paying bonuses. It went, instead, directly to the banks. What was it used for?
Well, I've not heard of anyone actually coming out and saying, but I have a strong suspicion: it was largely used to "repair the banks' balance sheets". What does that mean? Simple: it went to "pay" the loans that had been defaulted upon, where the collateral (if any) sold for less than the amount outstanding.
What does that mean for inflation/deflation? Two things: first, the act of printing that money by the Fed was *not* directly inflationary. Why? Because as soon as the money was printed and given to the banks, the banks turned around and made it disappear again, by taking the loans in question off the books. Secondly, the reserve they have to loan against is now higher than it would have been, of course, so it is potentially inflationary in the future, but that's very different from it being inflationary *now*.
And finally, remember the arbitrary rules I mentioned before? One of them is the fractional reserve ratio itself! Don't be surprised, if push comes to shove, to see that value kicked higher.
While there may be some strong pessimism here regarding the survival of the banking system itself, I have no illusions about it: it will survive, because the rules it operates under are entirely arbitrary, and the people who operate it are the most powerful in the western world, and possibly on the planet. The system will survive for as long as those people want it to. No more and no less.