Earlier this week, my pal Larry Kudlow showed a chart of M1. His purpose was to demonstrate that the growth of the money supply was modest, therefore future inflation expectations would/should subside. Hence, this would leave the Fed free to slash rates much further.
The unspoken subtext was this was needed to bail out a weakening economy and an increasingly volatile stock market.
If you want to prove that the Fed has been stingy, M1 is the wrong data
point to use — it paints a misleading portrait of money supply, as the nearby chart reveals. The
Fed, as we have seen, has been doing their work not via the printing press, but rather through the
Repo Credit market. The near daily repos, along with a little help from their Euro-buddies (who just injected half a trillion dollars of short term notes into their system.
M1 is merely physical currency, plus demand accounts. What you really need to see is M3, which includes eurodollars and repurchase agreements. (Hey, what do you know! The Fed no longer reports M3. What an astounding coincidence!).
Forget the printed dollars and focus on the rapid creation of credit by the Fed — not actual paper dollars for the metaphorical helicopter drop, but actual credit — and we discover an even uglier truth: The Adjusted Monetary Base (See St. Louis Fed chart below) is collapsing EVEN AS MZM GROWTH IS MOVING TO NEW HIGHS. As Bill King points out, this means that "Capital is now being destroyed faster than credit can grow."
Net net, all these liquidity injections are merely moderating the collapsing credit facilities, and not actually injecting much in the way of credit into the economy.
>
Credit Collapsing Faster than it can be created:
Courtesy of St Louis Federal Reserve Bank
>
Signs of economic of economic weakness abound, despite the massive injections of credit and liquidity.
Deep down inside, I suspect Larry realizes that much of the "boom" from 2002 til ’07 was driven by the absurdly cheap money — and not tax cuts, as has been argued by many on his show. Just about everything from share buybacks to M&A to private equity bids to the Housing boom and MEW driven consumer spending to weak dollar led export boom were functions of ultra-low rates. Now, that cycle has ended, and we are seeing the repercussions of the irresponsible policies of Alan Greenspan.
Time and time again we observe that *TANSTAAFL . . .
>
UPDATE: December 21, 2007 1:55pm
Here’s the requested shadow Fed M3 chart:
>
Sources:
*TANSTAAFL: "There Ain’t No Such Thing As A Free Lunch"
Monetary Trends
Research Division, Federal Reserve Bank of St. Louis
JANUARY 2008
http://research.stlouisfed.org/publications/mt/20080101/mtpub.pdf
Maybe another way to put it is that nobody, but nobody, WANTS the damn dollars–
The passage of time will expose the inane ramblings of a well-connected moron for what they are.
Nothing like a Bob Heinlein reference to make the bad news go down a little easier. Is there an easy way to bolt together an M3 substitute out of other reports? I remember the reason given when they pulled the M3 report was that all the information was _more accurately given_ in other reports. I’ve spent hours going through different FR bank sites, with no luck.
How much additional net liquidity has been supplied by emerging countries? Shouldn’t we also consider the impact that these emerging countries (China, India, Russia, etc.) have had/continue to have on the amount of cheap money available?
before I start TANSTAAFL isn’t that a double negative.
That was an impressive discussion on Larry’s show.
“Derivatives don’t count as money” is what I remember….
Too bad you seem to be able to spend derivatives like money.
Seems like Sovereign Funds are injecting a nice amount of money into our system (inflation). And has all the debt pulled from homes made its way into the economy? Or, are we still watching all the extra debt put inflationary prices on all other goods and services (ex-homes)?
I still think there are a lot of people who got a hundred grand or so out of their house and DID NOT roll it back into their house or a new one. So, that inflation has to show up sooner or later. Or, has rising energy and food costs soaked up a lot of excess cash?
Our economy was admitted to ICU well before it reached critical condition but the signs were there that it could go into shock. Now it’s stuck with IV lines. The Fed is ready; Paulson is ready, SWF’s are ready, etc to infuse the economy. The Prez. is ready; Congress has various plans.
Nobody can risk the passing of the Great Consumer.
There have been reports though, of ICU psychosis: a Black Swan has been seen floating through the air.
This info belongs here:
“Consumers spent with gusto in November, a sign the economy might not be as weak as feared, while a key gauge of inflation crept above the Federal Reserve’s comfort zone.”
…
“Commerce reported personal saving as a percentage of disposable personal income was negative 0.5% in November — the first below-zero figure in 15 months. Saving was positive 0.3% in October.”
http://online.wsj.com/article/SB119824347009245125.html?mod=hpp_us_whats_news
—-
Not exactly a picture of a weak economy or one entirely running on credit only.
….
Re above: Perhaps the Ideas here need adjusting, instead of the data only.
Yes but *INTEOTWAWKI
*Its not the end of the world as we know it;
Can you give a dummies explanation of the divergence between the monetary base and MZM?
M3 may not be reported any longer, but M2 is. Why didn’t Kudlow ask his guest why the analysis being presented focused only on M1? Maybe there is a good answer, but I’d like to have heard it.
Kudlow will never admit anything otherwise it would reveal his entire philosophy as fraudulent. The expansion was indeed the product of cheap money and a huge expansion of public spending(plus or minus 60% depending on whose numbers you believe). In other words good old classic Keynesian policies. Milt Friedman was definitely not around. The impact of the tax cuts probably had some marginal benefit but it was never the main driver. I keep wondering when someone on Kudlow’s show is going to highlight this simple truth. Perhaps show guests have to sign a pledge not to mention it or why haven’t they. Any theories Barry?
I look at the idea of a good recession as the beginning of a brilliant new economy.
As opposed to the bulls that keep hoping for a continuation of this malingering economy.
I know I’ll make money either way.
That is just me, I read my economics 101 text books about Business cycles.
I’d be super amused by a long lingering death of this bull cycle…
I’m just around to make money, stagflation, hyperinflation, recession, Denial….
Funny how all the cares of the world just vanish from everywhere when:
“Happy” data is released…
A company doesn’t lower guidance and actually beats it by a few pennies (next year that will be quite the exception rather than the rule
We have Yet another bottom call in housing (but it’s a stealth one from Cramer).
The last expiry. of the year (and the last reasonable attempt to inflate without drawing too much attention to themselves)
Merril selling out to (insert next watch buyer here)
Morgan needing more cash at just below sub-prime rates (you can argue that but you do not offer $2.5b in notes at 2 points over if you are not in need of it fairly quick-also it was self-led indicating that not alot of interest in writing that out from others) And no mention of any debt sales on the CC yesterday too.. at least ones that would occur LESS THAN 24 hours after you said capital structure is ok
MBI, ACA most likely sold billions worth of worthless insurance (now) since they do not have the means to pay it off.
But lets send up the markets just because….we have the daily infusion of cash from the Fed.
Yes it’s all good……
Ciao
MS
It would be rather interesting to find out that the “real” economy isn’t so tightly correlated to the credit bubble as we suppose! Just wondering about it. After all, consumers don’t seem to be focusing on CDOs much to decide how to live, do they?
Always be skeptical about your own ideas folks.
“Private wage and salary disbursements increased $36.0 billion in November, in contrast to a
decrease of $1.3 billion in October. Goods-producing industries’ payrolls increased $6.2 billion, in
contrast to a decrease of $2.2 billion; manufacturing payrolls increased $2.9 billion, in contrast to a
decrease of $1.2 billion. Services-producing industries’ payrolls increased $29.8 billion, compared
with an increase of $1.0 billion. Government wage and salary disbursements increased $4.0 billion,
the same increase as in October.
”
http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm
One thing I notice is that personal income has increased annually lately by more than the amount of spending that comes from MEWs. hmmmm…..
I have a proxy for M3 — it’s total bank liabilities from the H8 report –> ALNLTLLB Index for those with a BB terminal. It’s a very good proxy, though not perfect. Over the last years, it has run at an annualized 9.4%. MZM has grown around 12.8%. The monetary base has grown around 3%, and oddly, has not been spiking up the way it usually does in December to facilitate year-end retail.
The Fed is getting weird. At least, weird compared to the Greenspan era. They seem to be using regulatory policy to allow the banks to extend more credit, while leaving the monetary base almost unchanged. This is not a stable policy idea, particularly in an environment where banks are getting more skittish about lending to each other, and to consumers/homebuyers.
This has the odor of trying to be too clever, by not making permanent changes, trying to manage the credit troubles through temporary moves, and not permanently shifting policy through adding to the monetary base, which would encourage more price inflation. But more credit through the banks will encourage price inflation as well, and looking at the TED spread, it seems the markets have given only modest credit to the Fed’s temporary credit injections.
I am dubious that this will work, but I give the Fed credit for original thinking. Greenspan would have flooded us with liquidity by now. We haven’t had a permanent injection of liquidity in seven months, and that is a long time in historical terms. Even in tightening cycles we tend to get permanent injections more frequently than that.
Anyway, this is just another facet of how I view the Fed. Watch what they do, not what they say.
Did you read the story about how the banks aren’t sure if it’s better to take the loss, than to bail the monoline’s out….
Specially since they are short of them….
LOL(the last part isn’t part of the story)
Furthermore, this is all the shell game, it’s time for the institutional investors to do some year end purchasing. Wall street needs to put on the best show it can right now.
Who said to be skeptical while relying on Gov’t data??
Yes it IS important to remain skeptical in a market that:
has had over 7/10ths of a TRILLION dollars thrown at it in the form of repo’s (and the year is not over) that gets used in any way the user sees fit.
The wage data is hardly as we are supposed to think that growth went from negative $1 billion to $36 billion??? in one month???
Try some real evidence and not some trumped up gov’t stats. that can’t even stand up to the most basic of analysis. Remember these are the same people who, in July, said there was no spillover
Good Luck with that
Ciao
MS
Well, the “Markets Are Harsh Mistresses” indeed (RAH reference :)). Thanks for posting these. Clearly credit is being destroyed faster than it’s being created. Kasriel has an interesting Daily Commentary working this that’s worth reading:http://tinyurl.com/255whw . And in perfect counter-point harmony CalculatedRisk has a recent post on the failure of the last week’s auctions and credit injections to reduce the credit spreads:http://tinyurl.com/yqboxv.
I’d point you to my two recent entries on ho w much worse this is for structural reasons if Typepad would allow it. Just-in-case (JIC)try this: http://tinyurl.com/2c2vyd
“This has the odor of trying to be too clever, by not making permanent changes, trying to manage the credit troubles through temporary moves, and not permanently shifting policy through adding to the monetary base, which would encourage more price inflation. But more credit through the banks will encourage price inflation as well, and looking at the TED spread, it seems the markets have given only modest credit to the Fed’s temporary credit injections.”
I think the fed knows that the financial sector credit expansion of the last five years is simply not sustainable. The law of silly large credit numbers was starting to play out. A recession is no guranteed and the fed is just trying to smooth things out as much as possible.
How much of the increase in money supply is being neutralized by falling velocity due to tightening credit?
In my distant memories of econ 101 is the theory M*V=P*Y.
Clearly the credit contraction has had an impact on lending and subsequently money velocity has slowed. When velocity picks up again inflationary pressures will accelerate, so watch out in 2008 as credit eases!
MS, I tend to like to read very widely. But most real of all are more solid things like jobless numbers and same store sales, and what happens for weeks now when you go to a store: you stand in line.
“what happens for weeks now when you go to a store: you stand in line.”
you are obviously not shopping in the right places…my time is worth far more than “standing in line”
“more solid things like jobless numbers”
Yes the solid job growth….I think enough has been written here and elsewhere about the validity of those numbers. Just when employment was about to fall into an abyss (with the old model) this administration comes up with one that shows whatever it wants whenever it wants…..don’t forget all those upward revisions too….
Nice Try..
Ciao
MS
Time will tell. But if someone is objective they question their theories, and try to shoot them down. Very similar to the scientific method. Instead of looking to re-inforce your view, you search for contradictions and counter evidence.
So now the MZM-M2 spread has grown from
$169 billion in January to
$636 billion in Novmeber
For those interested in M3, check out this web site. I do not endorse nor do I know how these statistics are generated, but numbers they are.
http://www.shadowstats.com/cgi-bin/sgs/data
so now you are Abe Lincoln???
too funny……thanks for that “advice”
Apparently when viewing those wonderful Job numbers you have failed to take your own advice.
Good luck with that
Ciao
MS
“my time is worth far more than “standing in line”
How can your time be valuable when you constantly post comments on a blog?
The problem with the jobs is that the numbers arent that bad and the financial system is still struggling. Think about it this way. Im 28, I have multiple friends who own multiple homes. What are lives going to look like when we hit a rough financial patch when they are already strapped with a silly amount of liabilities. The under 40 crowd has bought everything on credit and has been able to live way beyonds means. Most of the boomer worked for 40 years and saved before they enjoyed the an affluent lifestyle. Does wall street and asia expect people to buy two or three houses every five years coupled with a couple of cars? Those consumption patterns and debt requirements are unsustainable at any interest rate.
you’ll notice that there is a bit more “time” involved in standing in line as opposed to posting on a blog.
But I guess you didn’t know that.
Ciao
MS
Sources:
*Tanstaafl: “There ain’t no such thing as a free lunch” WRONG Free lunch everday at THINKORSWIM!!!
Jobless numbers (as I mentioned above) are more solid than job numbers, of course. Let’s not get sidetracked so easily.
Barry
Please ban the word “Ciao” from your blog.
Thanks and
Ciao
*TANSTAAFL: “There Ain’t No Such Thing As A Free Lunch”
To paraphrase Robert Heinlein a bit: TANJE (There Ain’t No Justice, Either)
Here’s the situation: We all know very well the dozen main reasons the economy is supposed to go south, and consumer spending was to be the main dominoe to fall. But….looks like that is not happening, so, it’s interesting to look it over more critically, instead of defending a view, imo. Can we shoot down the very well laid out and strongly reasoned view that a recession is inevitable? If not, then that would suggest the view is correct. If so, then that’s valuable also.
$20T in OTC derivatives imploding.
The call was made for help and foreign money men answered the call.
The real question is this: Is the bailout only to get us to January 1? Or are they locked into a Keynesian “to big to fail” strategy. If the former,I feel sorry for all of us, if the latter I feel sorry for people around the world who have to dig a little deeper for Uncle Sam.
Damn it feels good to be a gangsta!
“But if someone is objective they question their theories, and try to shoot them down. Very similar to the scientific method. Instead of looking to re-inforce your view, you search for contradictions and counter evidence.”
VERY WISE PHILOSOPHY
a.k.a.- I can learn more from people that I disagree with than those with sympathetic views.
Bill
one day does not make a trend…and from the looks of what is being posted here it is safe to say that the data released today is convincing some of you that one day, in fact DOES make a trend.
Some advice that I was given should ring fairly true here:
“if you are right…. you will be for more than just one day”
Apparently Gov’t data has found a way to be right on one day and then bailed out the next. Does’nt sound like a recipe for growth now does it????
Ciao Blam
MS
Can this system be bailed out or put back together? Im not so sure it can be. If we were able to jump start it it would have already happened. This system is going to iffy for years.
Brian, while the posts by MS have a lot of value, much more value than if he were standing in line, I would say that your post has zero value, but is probably still more productive for you than standing in a line when you don’t need to.
For reconstructed M3 statistics (as well as many others), I prefer http://www.nowandfutures.com.
I’ve been long gold and silver since $625/13 and oz, and as long as central banks around the world are dumping money into the system, I will stay long gold. Oil is another good place to be – And for that matter, maybe even the stock market. I think we’re going to see a rally before we see a fall. Since the FED seems to be a retroactive institution, they’re going to inflate the money supply as far as they can and reverse course when inflation gets REALLY bad. So, go long gold and oil for now, and get ready for the reports stating inflation is very close to getting out of control, then sell 75% of the gold/silver stocks and buy SDS.
Interesting thing in the first graph. The slowdown in the money supply around 1990: when the Iron Curtain fell and a lot of countries tried to transistion from a command economy to a market economy. Then, years later, the transistion pains were over, and the money supply ramps up. Wonder about that, coincidence, or more likely a connection.
Robert – what is SDS? Thanks!
MS you are my hero. Seriously dude. Like wnsrfr said, your posts have value. Keep posting bro. And if you have a blog can you link to it one of these days? Thanks.
And for those who are spewing the “search for counter evidence” axiom, how about using it on your OWN opinions and views.
As Barry (and others) have constantly pointed out, US Govt and trade group (i.e. NAR) stats are grossly exaggerated and manipulated. Being significantly revised down the road and having plus/minus ranges that could easily swallow the reported gains.
As a novice, I haven’t looked at the jobless and wage growth numbers with precision, but even I understand the problem with aggregate data (such as the point Barry made in this post about money supply). Just because jobless numbers might be low does not mean there is a relatively higher percentage of temp or relatively lower wage employment. And, perhaps more importantly, employment/jobless numbers are LAGGING indicators.
As MS stated, the wage growth numbers seem a bit dubious. But even then, how do we know that they are evenly distributed? It could be that the top 10% saw 25% (I’m throwing out percentages to make my point) wage growth, while the rest saw far less significant growth.
In the end, time will tell. Not one day’s worth of market fluctuations.
Question for Robert (Gold/Silver guy), as well as others:
In a recession, wouldn’t the price of Gold increase as investors fly to safety? Or am I being naive, and the price of Gold will decrease just like stocks and the US dollar?
ms,
I love that one up day … and it will probably be a few from now till year end, as you and I have discussed for the past weeks.
and it brings the bulls out like they don’t read charts(just like they don’t read data).
A small data point… against the on-slot of bad data; that has the bull Killed, Carved up and ready to be placed on a spit in the new year.
Only investing dopes, think the market goes straight up or straight down
The desperation is what tells this story.
HALBHH : What do you think is going on with C.B.’s liquidity injections, brokerage houses looking for bailers, foreclosures on the rise, Paulson going to China with a tin cup? Call someone at MBIA or Citi to get their read.
Forget about the numbers – they are daily phantoms. The party isn’t going to stop till the consumer drops but the consumer is largely unaware of what is happening. The consumer is walking along the street and a piano is falling out of a window above. When calamity gets to the man in the street it is all over.
Umm wnsrfr looks like you missed the point. He stated his time was valuable. I have the premise that someone that posts on message boards all day every day has time that isn’t that valuable (unless he gets paid per post). No matter what you say I will always have that premise.
Hi guys
this is about the piano ,what I am afraid of is that in Europe ,pianos don’t pass the windows so they remain unprepared with no helmet .
besides ,they use to think streets are safe.
They pay huge taxes to piano watchers .
This time watchers were drunk , who will bail them out .
It seems to me that our recovery will be much faster and I see the value of the $ beginning to improve after 6 month and further by the time they digest the piano.
Things are not what they look like ,every one is getting aware of flying pianos.
emerging economies are the new way to heal
crushed highly developed countries that’s funny .
http://www.ezfrench.com will improve your french and the knowledge you may need about what they think on the other side
10 guys stand on a street corner, talking about how one of them spends to much time standing on a street corner…..
And we are going to have that debate…..
*Nods*
It’s times like this I try and not let my own hubris get to me.
I can’t wait, how we decide MS should spend his time……
1. Waiting in lines
2. posting
Are these the only choices? I suspect, most his time is spent reading and taking away everyone else’s money, being ahead of the curve.
I skimmed the comments and saw no M3 link, so here you go, a reconstituted version:
http://nowandfutures.com/key_stats.html
They have an article detailing their methodology and all.
And yes, it is as high as you would expect! (~17%)
V:
Did you hear the news today? The top dog at Goldman Sachs is getting $67 million this year(his bonus that is). I also thought I heard today that the top 4 Wall Street investment banks are paying out $30 billion in bonuses. Talk about skewing the wage report!!
Monzie: SDS is an ultrashort ETF that moves inversely to the S&P 500. For every tick the market moves down, it moves two ticks up.
v: That’s supposedly how it works, but I don’t really buy into the “flight to safety” reason for buying gold, unless things are REALLY bad. A good way to look at gold is to remember that money’s value changes, gold doesn’t. That’s a gross oversimplification, but it’s essentially correct. When governments print a lot more money, it takes more money to buy the same amount of gold, hence gold’s moniker as a “store of value.” When times get tough (as they are now), central banks will fire up the printing presses and flood the markets with liquidity, making gold rise relative to the value of fiat currencies. Hope that helps.
Let’s see halbhh, here’s a possible indication of the economy’s condition-(from Minyanville —
Going through the FedEx (FDX) conference call for clues to the economy, it really doesn’t get any more explicit than this: “The profit decline was primarily due to the net impact of substantially higher fuel cost, and continued weakness in the US economy, which is limiting demand for our US domestic express package and less than truck load freight services.” That’s according to CFO Alan Graf. However, later in the call Graf backtracked a bit from the seemingly strong language, saying, “we are not expecting a recession, we are expecting continued growth although it would be low.”
Meanwhile, with respect to holiday sales, the company noted that they are not seeing the surge in package volume traditionally associated with the holiday season. CEO Frederick Smith said, “the quarter relatively speaking did not see the increases that you would expect to see as you approach peak season approach the Christmas holiday period.”
halbhh: “what happens for weeks now when you go to a store: you stand in line.”
Hint — Xmas is coming, and even if one doesn’t celebrate it, many are still getting a year-end break for which they have to stock up.
I’m likewise observing a seeming reintroduction of more substantial “sales”, but that’s not untypical for holiday shopping times either.
Re strawman questions, not worth your time or mine.
But ask why you got so defensive!
In case estragon or others who are interested show up here, here’s my question:
————–
Since I think like most of us a recession is likely, my own thinking then turns to examine possible reasons a recession would not happen. Further examine (repeating) the already known reasons a recession will likely happen aren’t of much use I think. That’s what we already know (or most of us). Instead, the interesting question is:
What might prevent a recession in spite of all the forces pushing towards one?
:-)
Now, see, isn’t that a lot more interesting?
…
[Kuwoting] both Barringo and Bill King:
[As Bill King points out, this means that “Capital is now being destroyed faster than credit can grow.”] end ku-woting.
—
Ah, yes, yes, yes that’s exactly the case, and, contrary to defenders of monetarism (specifically – all those who support the erroneous notion that the Fed was not responsive enough during the Great Depression of the 1930s), the exact same thing happened during that tumultuous prior time in our history when the Classical Theory observation that MV = PQ also lost its capacity to modulate output.
It’s because money doesn’t exist as you all have perceived it to exist in your conventional understanding of money.
I’ve explained all this in long detailed theoretical writings posted on this blog. Here are some links to my work posted on TBP (Perceived Liquidity Substitution Hypothesis):
http://tinyurl.com/ytdjxv
It’s possible that before it’s all over, Dr. Benber N. Anke may be willing to withdraw his prior apology given to the now-deceased Milton Friedman… that being the “tongue in cheek” apology given to the still-living Friedman on behalf of a Fed that supposedly failed its responsibility during the 1930s, but as Bernanke assuredly opined, (prprz) the Fed “wouldn’t ever do so again.”
You are all now living witnesses to just how such a phenomenon as we are experiencing presently isn’t much different from the one they experienced t-h-e-n. The only difference between them, to now, is one of relative magnitude.
While I admired and respected Milton Friedman (no personal acquaintance or affiliation with the deceased professor, but wouldn’t it have been fun!)…
http://en.wikipedia.org/wiki/Milton_Friedman
…I had always anticipated that he might live long enough to discover the error of his theories before he died, that great error being his erroneous conclusions about the relationship of cause and effect.
It’s not that a collapsing money supply c-a-u-s-e-s the ill effects of economic malaise, it’s that some event in aggregate human psychology causes the collapsing money supply itself, and as Bill King is observing accurately, it can overcome the capacity of the Fed to do anything about it, with or without Bernanke’s apology to Milton Friedman.
Now I suppose that in the blessed afterlife it’ll be up to Benber N. Anke to break the news to the old professor as gently as possible.
—
p.s. – I have never used the characterization of Chairman Bernanke’s name “Benber N. Anke” in any way meaning to be disrespectful of him. Rather, I see him to be an incredibly intelligent, objective, thoughtful, practical and discerning scientist in his profession. He’s a good man working hard to solve problems that were not of his making. Hat’s off to him. My characterization is merely used as an element of comical relief. I hope it is received as such.
. . . some event in aggregate human psychology causes the collapsing money supply itself . . .
Eclectic, couldn’t we also ask if aggregate human [within a monetary-issuing nation] psychology is an effect of global wage arbitrage which will tend to collapse both the money supply and spirit of a higher-wage nation?
Might not a collapsing money supply also cause the tried and (perhaps workably) true 9-to-1 fractional-reserve banking ratio to have been violated by Fed actions, regulation changes, and regulatory failures — thus leading to the resulting financial fraud and distrust we’re now seeing.
The chicken or the egg?
Wyler, yes on both your phrase points:
“global wage arbitrage”
…because the population of the U.S. was not mentally and emotionally prepared for the shock, and the empty illusion of monetarism was the only tool available to policy makers.
“fractional-reserve banking ratio”
…but frac-res doesn’t have to contribute to the problem, but unfortunately monetarists are never f-u-n-c-t-i-o-n-a-l-l-y capable of holding to their own philosophical tenants, which, if held to, would also control the execution of frac-res restraint.
Neither of your points are necessarily major contributors to the threats to the financial system we face now.
This one comes from an amalgam of equal parts of:
-Fraud (some criminal, but mostly passively quasi-innocent);
-Optimism expressed solely as a form of willfulness for its own sake (optimism without a valence indicator);
-Reliance on pro-forma EBITDA accountancy (at the corporate stock company level, not consumer accountancy which might never have been better than it is now);
-Reliance on supply-side economic theory as a policy tool;
-Failures of the Fed (in numerous ways), for which defending that notion has now become all but untenable;
-An unaware and cooperatively ignorant public; but…
…I’d also be intellectually dishonest not to observe that there is also a component of the…
-Random occurrences of domestic or geo-political shocks that have an interplay with these other listed factors.
—
BTW Wyler,
It’s been a Wyle since we enjoyed sharing a mutually enjoyed metaphor:
http://bigpicture.typepad.com/comments/2007/04/top_15_creditor.html
I have a near-photographic memory.
Where you been a-keepin’ yo-self? We done picked’n ginned allda-cotton. ‘Em-arre stalks is jiss a standin’ bare in the cold, wet and wind, and I show duz wish for sum to be a-hidin’ in, don’chee know. By mys soul I show do!… show do!… I wish for bein’ back in-nat summertime. I can see dem fish a-jumpin’ an-nat tall purdy cotton a-shimmerin’ in the sun. Yep, I show do like it when the livin’ is easy!
“Capital is now being destroyed faster than credit can grow.”
This is an odd comparison as in our fiat/debt monetary system, debt and capital are the same thing.
The Federal Reserve cannot create dollars willy-nilly but must back that creation with an equal amount of debt – so how can capital disappear faster than credit can grow?
It cannot – unless – this capital that is disappering was never real in the first place – “mirage capital” created by leveraging. What is occuring is an unwinding of mirage capital caused by the drop in value of the underlying collateral.
This is the problem the Fed is trying to address in its TAF operations, setting a baseline price for damaged collateral. It is a nationalized method of creating a base of collateral value to support mirage capital.
From here on out, the Fed is advertising Fire Sale Prevention Week.
Bring us your tired, your poor, your crappy paper yearning for a bid….
Winston,
…total agreement…
…just without any hints at conspiratorial purpose, which you inevitably include in most of your assessments. I suppose it’s that resident cynicism you’ve admitted to maintaining.
Now I could be way off the mark here if so please eloborate,
But is not this mirage money a function of the “disintermediation” (credit created outside the FED system) caused directly by the repeal of Glass-Steagal and other post debaucle solutions implemented after the ’29 crash. Gramm-Leach effectively repealed preventions legislated to prevent the conflicts of interest under the guise of transparency which only aided in the generation of more opaque instruments. Of course the banking system as a whole is suffering but the top teir execs ran out with record bonuses. Their lobby repealed these protections how can this be viewed as fortunate coincidence.
Please reply as no one has refuted this allegation in several months of attempts.
what is all the fuss with what the fed does ??
Since going off the gold standard, the feds job has always been to print money.
Iaccept that as fact, and invest accordingly.
Eclectic,
This is high praise indeed (and I am very serious), when you concur with my assessments. Somewhat akin to the feeling when the Professor reads your paper outloud to the class.
Insofar as my rales go, I do wish to make clear that it is not any one person or group that incurs my wrath (Bernanke is a bright guy). What irks me is that we have no choice but to work within the framework of a flawed system.
Winston
What are your thoughts regarding Ron Paul’s competing currency initiative in which savers would be allowed to store their wealth in monetized metals, the nominal appreciation of which would be tax exempt. I’m not referring to a peg here, but a free-market float for PM’s and FRN’s with convenient convertibility. Would this not go a long way to constrain currency debasement?
I’m trying to be some “DO” here as opposed to my previous all “MOUTH”
This method in no way deminishes the FED system it merely enhances the free-market.
Stormrunner,
I’ll try to answer as best I can. Your assessment in my mind is quite accurate, that deregulation is the major cause of this dislocation.
This, I believe, is what explains the conundrum of CPI versus real world price rises. In traditional sense, inflation is defined as a debasement of currency caused by an increase in total currency; however, we have not seen currency inflated; moreover, we never will due to the nature of our monetary system – deb-fiat; Weimer-like hyperinlation is caused by currency expansion with no corresponding offset; in the U.S., the Fed cannot do this as there must be a corresponding debt.
This gets us to our present situation. The expansion has been caused mostly by OTC operations, which the Fed allowed to occur out of its control. This “mirage money” had to go somewhere, as it was time-based, i.e., a creation of leverage (debt). Thus, the mirage capital had to pour into assets, driving up prices of many asset classes.
Traditional inflation based on monetary expasion has not occured – asset-driven mirage inflation is more accurate. This is the nightmare the Fed is working to avoid, for if the credit markets collapse all this mirage inflation will also vanish, causing systemic collapse.
As for how we got to this point, I’ve posted this before but still find it the best overall description of the role of deregulation: http://www.prospect.org/cs/articles?article=the_alarming_parallels_between_1929_and_2007
Eclectic and others, re: “It’s not that a collapsing money supply c-a-u-s-e-s the ill effects of economic malaise, it’s that some event in aggregate human psychology causes the collapsing money supply itself, and as Bill King is observing accurately, it can overcome the capacity of the Fed to do anything about it…”
—
It’s certainly true that generally recessions require and are mostly psychology: that is, their depth and strength depend on consumer’s expectations about their own prospects, of course.
About whether the Fed can do anything about how quickly the bubble deflates and the consequences: since the severity of a recession or slow down depends on psychology (expectations), then the putative actions of the Fed and Federal Gov. in general modify the expectations and fears, creating a real effect. So the Fed can do something, but…the trillion dollar questions are how much.
Will the dissapearance of credit bubble assests be significant enough for ordinary job holders/consumers to be truly frightened enough to change their spending (more than only the cautious minority)? I’d think to be really strong, this collapse effect has to be more direct: it has to be not only some modest fears, but actual non-financial businesses other than a few homebuilders and mortgage lenders closing down. Otherwise, why shouldn’t 70% of the Joe Smiths go ahead with that big remodel they were planning in January, etc.?
Stormrunner,
I’m not familiar with this concept, but as Ron Paul is the only candidate who seems willing to “think outside the box”, I would listen carefully to any ideas he proposes.
Again, there has not been exagerated currency debasement, so that is not the problem. The problem is in unregulated and uncontrolled credit expansion, based on shaky collateral. It is hard to wrap one’s mind around the size of this bubble, but if the credit markets cannot sustain the madatory increases in debt to sustain the bubble, we are likely to hear “The pop heard ’round the world.”
Halbhh,
Your posts are thought-provoking and welcomed. I do think your are over-exagerating the importance of the consumer and underemphasizing the role of debt, though.
With a few notable exceptions, it is the availability of credit that allows corporate America to function. Without that availability, companies are forced into a self-preservation shell – expansion plans are replaced by survival modes.
Eclectic mentioned the psychological aspect of this, and I believe he is right. Human nature has two basic driving forces, the desire for gain and the fear of loss. The desire for gain drives bubbles; the fear of loss causes the collapse.
Debt is a tool of business, and it can be benificial as well as destructive; when the fear of loss is the compelling psychology, additional debt is viewed as too high risk to be of benefit. Being a commodity, debt is controlled by demand/supply, so when its value does not correspond to its risk, it is shunned, and debt contration takes its place.
It is not the consumer who first decides to stop spending; it is the actions of companies who stop spending, stop expanding, and finally stop hiring that causes the consumer to share in the fear.
Winston, good points: it would stand to reason since established companies of good standing can still borrow generally (so far as I know), it’s the possible effect on startups that matters. But a slowdown in employment gains from young businesses for a while (at least) isn’t yet the stuff of a major recession I’d guess. The big domino (in the domino theory here) has to be the consumer. Only if the consumer really pulls back in a major way (not just flat spending!), there wouldn’t be large job losses, and thus no major recession. We already know businesses have been extremely conservative in hiring during the expansion, and don’t have a lot of excess employees or inventory either, so conditions aren’t cut and dried surely.
To clarify: though a recession seems likely from the totality of forces pushing that way, there are enough mixed forces that it’s worth thinking about whether a recession may be averted by some other factors. I’d agree that Fed credit itself isn’t such a big factor, while the psychological effect on the consumer from Fed actions (though they may be modest in actuality) is quite signficant. So could the psychological effects of Fed actions, world growth momentum, export demand, and general economic momentum together make it a close call? I’d say close enough to work thru the pieces to figure it out.
Winston
Agreed
Even though M0, M1, MZM measures are relatively flat, the credit expansion M3 has created the same inflationary effects without destroying the currency. So this brings to question sustainability of the new price level. As credit can be mopped up more easily than over printing a more acute transfer of real wealth has transpired than if we had actually experienced conventional monetary inflation. The banking and industrial elite have amassed exceptional personal fortunes from which to emerge despite the calamity that is the brick and mortars they preside(ed) over equating to lost, employment, and savings, of the wage earning class including those who did not participate in the mayhem.
When considering an accident, vehicle, driver and current regulation must be considered to determine culpability, relying too heavily on the mental state of the driver, while allowing the mechanics to take a back seat is very narrow in approach. Criticisms of the system being labeled as conspiracy as opposed to what they truly are ideology is detrimental to constructive remedy. If a system generates imbalance not only does equilibrium need to occur but also mechanisms to assure similar inequities do not reoccur. This is twice now in less than 10 years. If legislation can not result in proper monetary oversight then the only ration solution is Free-Market competing monetary options such as the Paul Platform, which the crux of is monetizing PM’s and removing the tax to keep the purveyors of fiat in line. On its face not a difficult study but will it work?
Where you been . . . [btw have you heard Kathy Mattea’s “Where’ve you been?” –not really applicable except for the song connection but nonetheless a heart-rending ditty]
[Going back to April] . . . I’ll leave you with that, and you can try to get the tune out of your head for the rest of the day.
Funny thing, Eclectic, not only did that Summertime tune and your item stick with me for the rest of the day — they’re keepers and still comfortably bobblin’ around in my brain.
But now today notions of shells as money and your PLSH are creeping in there — still mulling (as it appears some recent posts are) whether psychological factors are cycle&conditions causes or effects, though . . .
Stormrunner, I read an recent article by Paul Krugman “Blindly Into the Bubble” (similar to your concerns) just now, and was thinking: in the end, the way markets often fail people is thru the mechanisms that short-circuit caveat emptor.
If we think some government body is watching out for us, we don’t look things over as well as we should. In reality, the regulator is always far from perfect, even culpable often. The result: the scamming of the little guy goes a lot farther than it would without a regulator.
Reasonable points all.
Let’s put this one to sleep. Maybe this is a good way, and then I can drift away with Jack:
http://www.youtube.com/watch?v=dd6xZr-igus&feature=related
**correction** for clarification by [editing].
-Failures of the Fed (in numerous ways), for which defending [the Fed] has now become all but untenable;
A late afterthought that should append to this topic’s discussion:
Wyler (and any others who wish to understand the phenomenon that is being observed as the basis for this current topic heading),
Wyler, once before I left you with a song. This time read or re-read everything I wrote here:
http://bigpicture.typepad.com/comments/2006/11/econojunk_fix.html
Read it with an open mind and attempt to do so without encumbering its message with preconceptions you have developed over your lifetime about the definitions of money, power, labor, productivity and wealth. You have to be an open vessel or you’ll never understand it. But, when you do understand it, a summary paragraph I’ve used in my writing, reproduced [here]…
[The academic and policy implications of this should be staggeringly obvious. It would be relatively as though I have suggested that the sun rises in the west to suggest this phenomenon; that the element of conventional monetary policy thought to be most needed in a crisis is instead: sterile.]
…will jump from the page into your brain to nibble around there with your other images of cotton and the melody of summertime. And, one word will take on a new meaning for you. The word is ‘S-T-E-R-I-L-E’ and that’s the word for these times.
halbhh,
If you think the credit problem is not correlated to the economy, then you need to do some research on how money is created, what role banks play in an economy, how the Fed works, and how economies boom when credit becomes available to the masses. You are correct: the average person is not exposed to CDO’s. HOWEVER, lending institutions ARE EXPOSED. And since they must have a certain level of assets on their books to keep the magic of fiat money working, then when an entire niche of their investments (e.g., CDOs) goes bust, they must get more assets on the books to make up for the disappearing ones. Thus, banks MUST hold capital for their own books rather than lend it out. Consequently, the average person (and business entities) first may not be able to get credit (e.g., mortgages), and then later may be only offered expensive credit.
The web of interconnectedness spreads far and wide. The Fed and banks are the genie bottles that produce the pixie dust that is THE SOUL of our economy. When a problem with credit exists, a problem with our economy exists. Or, stated in other words, can you show me a transaction economy based on money (i.e., not barter) that functions without money or credit?
I read this today, from the Sunday AP, and couldn’t resist adding it…the article re-enforces my position that the end result of this mortgage-securitization fiasco will be a nationalized bailout:
Quote AP: “Gaining some currency is the idea of a government agency modeled after the Resolution Trust Corp. of the S&L days that would buy up mortgage-backed securities as a way of dealing with bad loans. About $100 billion in such loans have surfaced and an additional $200 billion are likely, according to market estimates.
If the government spent $150 billion to $200 billion to purchase mortgage-backed securities, the thinking goes, it would prevent a fire-sale that would drive prices of these securities even lower.”
So if I understand this proposal correctly, the very industry that created these idiotic securitized assets refuses to trade in them, so the assets will be dumped onto the U.S. taxpayer at inflated prices in order to nullify the balance sheet deductions that real accountacy would require, in order to keep these entities solvent enough to continue to create ficticious leveraged capital based on the same toxic crap as before?
That’s a good plan – I like it. While they are at it, I own some options that have not met my expectations – so I’m pretty sure the government will also buy these and pay me what I think they are worth….won’t they?
Winston
it would appear that I had read the link you provided yesterday back in October, my opinions regarding a solution after much thought in other threads are actually leaning away from chartalism or neo-chartalism toward simply removing the tax and monetizing PM’s, it s simple non intrusive, no peg required, vehicle for storage/exchange exists in free-market forms such as E-Gold, others would undoubtedly arise.
The beauty is the elimination of the peg which seems to have been the reason for the elimination of commodity backing in the first place as it required a perpetually increasing supply of PM’s to back the expanding FIAT.
Implications, on a day to day basis, gold fluctuates, fiat fluctuates but each are easily convertible for market applications shopping, investing, whatever, depending on the requirements of the vendor.
The proposed affect, a much more narrow range of movement in FIAT valuation and inflation.
Now I don’t have a link to the exact Paul proposal but even if my understanding is inaccurate on some levels
Does what I am proposing make sense or would it just create a new level of obscurity??
A holiday tidbit in ’82 Ron Paul co-authored this book “The Case for Gold” which is free at the link provided, I have not read it yet but will be.
http://www.ronpaullibrary.org/books.php
Even if some would dismiss Ron Paul’s platform as fringe many in the financial arena recognize his comprehension of monetary constructs and his campaign is bringing conversation to the table. Even if his GOP run ends in defeat this conversation given the present economic environment is likely to continue.
The idea I have put forth is certainly simplistic, no need to tear apart a Act of Legislation such as the MRA. Certainly the brain trust here has an opinion.
Eclectic
you indicated you enjoyed reading the critique I left of your (Perceived Liquidity Substitution Hypothesis):
Did you regard the translation/assessment as accurate?
http://bigpicture.typepad.com/comments/2007/12/treasury-plan-t.html#comments
DH, as usual I’ve been too brief I imagine, and unclear. I’d guess all of us underestand how the credit bubble drove extra economic expansion, and probably all of us understand the full idea of credit contraction feedback loops, etc. But….very interesting questions are here now: will consumers who are not overextended, who pay their cards in full every month or have low balances pull back their spending right now because of news (of CDOs, etc)? News. Will they react to news?
How will the *news* of the Fed actions affect them? Etc. It could easily be the difference between a slowdown and something a lot more severe.
Also, I rather think that even in a more severe credit crisis, most consumers will find credit cards quite available. If anything, in the last 2 months I get even more offers hoping for a balance transfer or cash advance, etc. We are very far from ordinary consumer credit being withdrawn.
Stormrunner,
What does abandoning a gold standard for a fiat-debt standard accomplish?
A fiat-debt standard removes governmental spending constraints.
This is the point of which Ron Paul has a significant grasp – to unwind the effects of fiat-debt monetary policy, it is critical to start from the perimeters and work inward, to redistribute the assets used now to maintain the imperial war apparatus and its associated industries into national infrastructure, education, and investement – those things which actually contribute to the wealth of a nation instead of impoverishing it with unpayable debts.
Without this redirection, there can be no effective monetary policy change.
Since the passage of the DIDMCA of March 31st, 1980, the money supply has become unknown & unknowable.
Even so, what originally went for M2, went for M3. And M2 erroneously includes MMFs in its definition. MMFs are the customer’s of the commercial banks. They are sizable financial intermediaries.
Monetary savings are never transferred from the commercial banks to the intermediaries; rather are monetary savings always transferred through the intermediaries. Whether the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to intermediary institutions will not, per se, alter the total assets or liabilities of the commercial banks; nor alter the forms of these assets or liabilities.
Financial intermediaries (MMFs) lend existing money which has been saved, and all of these savings originate outside the intermediaries. The utilization of loan-funds, or the activation of the monetary savings by these financial intermediaries, is captured thru the velocity of their deposits (bank debits/withdrawls), and not thru the volume of their deposits.
I.e., from the standpoint of the economy, MMF deposits never leave the CB system. And the growth of the MMFs is prima facie evidence that existing funds/savings have already been spent/invested (transferred) by their owners/savers to borrowers. I.e., this represents a double counting of the supply of money.
Even now, M3 is meaningless as is the monetary base [sic].
Posted by: halbhh | Dec 21, 2007 11:49:25 AM
I have a proxy for M3 — it’s total bank liabilities from the H8 report –> ALNLTLLB
Someone’s got their thinking cap on.
Storm,
Regarding Mr. Robertson’s comments to you about my work:
He is correct that I exclude credit from perceived liquidity, but only because as a balance sheet item for the individual it has an offsetting liability.
Borrowing against assets that I claim to be deferred liquidity (pensions and the like) and yet leaving them intact is no reason to assume them still illiquid as he does, simply to continue to preserve the notion that some assets are considered illiquid by market participants. None are. None are… None.
To my mind, borrowing money against deferred liquidity assets is simply a partial conversion of the asset to perceived liquidity, because the debit that must be cleared resides with the deferred liquidity asset… not with perceived liquidity (perceived liquidity has no conversion costs whatsoever). The conversion costs r-e-m-a-i-n as a component of deferred liquidity, even if deferred liquidity assets are lost to market fluctuation or in the case of hard assets to casualty loss.
Money advanced against them that would augment the borrower’s perceived liquidity to create debt, that is then presumably no longer serviceable in the event of market or casualty losses, is STILL somebody’s perceived liquidity, either the borrower’s or his creditor’s, or if not recoverable to either of them, it’s in the pockets of the borrower’s lawn service man, his barber, doctor, grocer or any of his other goods or services providers.
Where he states about my concept of perceived liquidity “My own view on this is that ‘perceived liquidity’ is what I would call one’s feeling of financial well being, security etc.” and he then extrapolates that feeling into the irresponsible extension of credit, he’s missing the point of my definition of perceived liquidity e-n-t-i-r-e-l-y. Perceived liquidity is simply a magnifier of nominal liquidity and it can increase substantially, relative to nominal liquidity measured *at the same time*, and both can be substantially declining.
How many times must I say *at the same time*? My readers should understand that I’m not saying that net perceived liquidity must increase in a crisis, but only that it will modulate what there i-s remaining of nominal liquidity available, measured *at the same time*, and do so on an ever increasing basis to a higher perceived value according to the magnitude in which the coefficient of perceived liquidity will increase.
His analysis of my hypothesis as in any way stimulating hyperinflation of, as he terms them, “safe assets” is a bit off course. While I have explained that hyperinflation does not negate my hypothesis, my writing is all about deflation that typically accompanies economic malaise.
Otherwise, I’d have to see some of his writing to understand just how he may agree with me or not, and to be fair to him he hasn’t claimed to do any extensive review of my work, and he hasn’t refuted any of it in particular.
Storm, nothing about Ron Paul’s overtures changes one iota of my work. Nothing about my hypothesis would change even if we adopted an entirely new system of central banking, currency money and credit in the U.S. I actually like much of what Paul says. However, I’ve also said that what appeals to most of his followers would require a spirit of cooperation even in its fiscal and monetary application, a spirit that is just as liable to abuse as the one we have now is liable to it. Were we able to garner the spirit of cooperation needed to implement his system, we could use that same spirit to preserve and improve the one we HAVE NOW.
David Merkel | Dec 21, 2007 11:51:55 AM
have a proxy for M3 — it’s total bank liabilities from the H8 report –> ALNLTLLB
Sorry: Attributed comment to wrong author.
halbhh,
From how I understand your point, it seems you are overrelying on the importance of consumer spending for the prospects of recession. I apologize if I have misunderstood your point of view.
Nevertheless, for general discussion is should be noted that consumer spending is the most stable of economic functions and is not a good bellweather for prognistication of impending recessionary risk.
Consider this:
Quote: By Mark Skousen
“….Many factors are far more significant than consumer spending in stimulating the economy: business spending on capital goods, tax cuts, lower interest rates, and productivity. In the business cycle, production and investment are what lead the economy into and out of a recession. All the while, retail spending is relatively stable.
In fact, retail sales are so stable that they cannot be used to predict the next recession or bear market on Wall Street. Inflation-adjusted retail sales actually rose during the 2001-03 recession and bear market, as industrial production fell.
Thus, the truth is the opposite of the conventional wisdom: Consumer spending is the effect, not the cause, of a productive healthy economy.
The reality is that business and investment spending are the true leading indicators of the economy….” End Quote.
It is the engine that pulls the freight train, not that cars that push it forward.
Business is the engine; consumers are just along for the ride; debt is the fuel the engine requires to function.
Storm Runner: You got it good.
The structural alterations in our banking system and the practices thereby engendered, led to a mélange of excessively destabilizing price changes, especially of those assets, real estate, etc., which serve as loan collateral. The whole brew of ill-advised deregulation and regulatory permissiveness fostered an atmosphere in which greed seemed to triumph, especially if a little fraud was diluted with a heavy does of incompetent supervision by the authorities and their examiners.
There are no monetarists at our universities nor on the Fed’s research staff. There are no monetarists period. Economics is about the rates of change in the flow of funds:
The commercial banks should get out of the savings business (REG Q in reverse). What would this do? The commercial banks would be more profitable – if that is desirable. Why? Because the source of all time deposits is demand deposits – directly or indirectly through currency or their undivided profits accounts. Money flowing “to” the intermediaries actually never leaves the com. banking system as anybody who has applied double-entry bookkeeping on a national scale should know. The growth of the intermediaries cannot be at the expense of the com. banks. And why should the banks pay for something they already have? I.e, interest on time deposits.
From a systems viewpoint, commercial banks as contrasted to financial intermediaries prior to the DIDMCA; (S&Ls, MSBs, CUs), never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing DDs, or TDs or the owner’s equity or any liability item. When CBs grant loans to or purchase securities from the non-bank public (which includes every institution, the U.S. Treasury, the U.S. Government, state, and other governmental jurisdictions) and every person, except the commercial and the Reserve Banks), they acquire title to earning assets by initially, the creation of an equal volume of new money-DDs.
The lending capacity of the member CBs of the Federal Reserve System is limited by the volume of free legal reserves put at their disposal by the Federal Reserve Banks in conjunction with the reserve ratios applicable to their deposit liabilities (transaction accounts), as fixed by the Board of Governors of the Federal Reserve System.
Since 1942, money creation is a system process. No bank, or minority group of banks (from an asset standpoint), can expand credit (create money), significantly faster than the majority banks expand. If the member banks hold 80 percent of all bank assets, an expansion of credit by the nonmember banks and no expansion by member banks will result, on the average, of a loss in clearing balances equal to 80 percent of the amount being checked out of the nonmember banks.
From the standpoint of the individual commercial banker, his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, and probably its free legal reserves, not a tax [sic] – and thereby it’s lending capacity. But all such inflows involve a decrease in the lending capacity of other commercial bank (outflow of cash and due from bank items), unless the inflow results from a return flow of currency held by the non-bank public, or is a consequence of an expansion of Reserve Bank credit. Hence, all CB liabilities are derivative.
That is, CB time/savings deposits, unlike savings accounts in the “thrifts”, bear a one-to-one relationship to demand deposits. As TDs grow, DDs shrink pari passu, and vice versa. The fact that currency may supply an intermediary step (i.e., DDs to currency to TDs, and vice versa) does not invalidate the above statement.
Monetary savings are never transferred to the intermediaries; rather monetary savings are always transferred through the intermediaries. Indeed, as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that savings can be “attracted” from the intermediaries, for the funds never leave the commercial banking system.
Consequently, the effect of allowing CBs to “compete” with S&Ls, MSBs, CUs, MMFs and other intermediaries has been, and will be, to reduce the size of the intermediaries (as deregulation did in the 80’s) – reduce the supply of loan-funds (available savings), increase the proportion, and the total costs of CB TDs.
Contrary to the DIDMCA underpinnings, member commercial bank disintermediation is not, and has not been, predicted on interest rate ceilings. Disintermediation for the CBs can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction, as a consequence of currency withdrawals. The last period of disintermediation for the CBs occurred during the Great Depression, which had its most force in March 1933. Ever since 1933, the Federal Reserve has had the capacity to take unified action, through its “open market power”, to prevent any outflow of currency from the banking system.
However, disintermediation for financial intermediaries-S&Ls, MSBs, CUs, etc., is predicated on their loan inventory (and thus can be induced by the rates paid by the commercial banks); earning assets with historically lower fixed rate and longer term structures. In other words, competition among commercial banks for TDs has: 1) increased the costs and diminished the profits of commercial banks; 2) induced disintermediation among the “thrifts” with devastating effects on housing and other areas of the economy; and 3) forced individual bankers to pay higher and higher rates to acquire, or hold, funds.
Savers (contrary to the premise underlying the DIDMCA in which CBs are assumed to be intermediaries and in competition with thrifts) never transfer their savings out of the banking system (unless they are hoarding currency). This applies to all investments made directly or indirectly through intermediaries. Shifts from TDs to DDs within the CBs and the transfer of the ownership of these DDS to the thrifts involves a shift in the form of bank liabilities (from TD to DD) and a shift in the ownership of DDs (from savers to thrifts, et al). The utilization of these DDs by the thrifts has no effect on the volume of DDs held by the CBs or the volume of their earnings assets.
In the context of their lending operations it is only possible to reduce bank assets and DDs by retiring bank-held loans, e.g., the only way to reduce the volume of demand deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.
The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can make loans (if monetary policy permits and the opportunity is present) which amount to server times the initial excess reserves held.
Financial intermediaries lend existing money which has been saved, and all of these savings originate outside the intermediaries; whereas the CBs lend no existing deposits or savings; they always, as noted, create new money in the lending process. Saved DDs that are transferred to the S&Ls, etc., are not transferred out of the CBs; only their ownership is transferred. The reverse process, which is called “disintermediation”, has the opposite effect: the intermediaries shrink in size, but the size of the CBs remains the same.
Professional economists have no excuse for misinterpreting the savings investment process. They are paid to understand and interpret what is happening in the whole economy at any one time. For the commercial banking system, this requires constructing a balance sheet for the System, an income and expense statement for the System, and a simultaneous analysis of the flow of funds in the entire economy.
From a System standpoint, time deposits represent savings have a velocity of zero. As long as savings are held in the commercial banking system, they are lost to investment. The savings held in the commercial banks, whether in the form of time or demand deposits, can only be spent by their owners; they are not, and cannot, be spent by the banks. CB deregulation created stagflation.
From a system standpoint, TDs constitute an alteration of bank liabilities, their growth does not per se add to the “footings” of the consolidated balance sheet for the system. They obviously therefore are not a source of loan-funds for the banking system as a whole, and indeed their growth has no effect on the size or gross earnings of the banking system, except as their growth affects are transmitted through monetary policy.
Lending by intermediaries is not accompanied by an increase in the volume, but is associated with an increase in the velocity of money. Here investment equals savings (and velocity is evidence of the investment process), where in the case of the CB credit, investment does not equal savings but is associated with an enlargement and turnover of new money.
The difference is the volume of savings held in the commercial banking system is idle, and lost to investment as long as it is held within the commercial banking system. Such a cessation of the circuit income and transactions velocity of funds, funds which constitute a prior cost of production, cannot but have recessionary effects in our highly interdependent pecuniary economy. Thus, the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on GDP and the level of employment (structural changes have reduced the validity of this last conclusion. Under existing institutional arrangements, an increase in time deposits results in an offsetting increase in transactions velocity – therefore no dampening effect results. If there is to be a growth in time deposits there should be an offsetting increase in velocity)…
It began with the General Theory, John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”
In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make the statement correct. Perhaps this is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, Reg Q, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, etc.
(1) Ben S. Bernanke
Chairman and a member of the Board of Governors of the Federal Reserve System. Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body.
At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand. Thus, policy must be flexible and ready to adjust to changes in economic projections.
2) European Central Bank (ECB) Central Bank for the EURO
The transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level…
3) Janet L. Yellen, President and CEO of the Federal Reserve Bank of San
Francisco
You will note that I am casting my statements about the stance of policy and the outlook in very conditional terms. I do this because of the great uncertainty that surrounds these issues. Frankly, all approaches to assessing the stance of policy are inherently imprecise. Just as imprecise is our understanding of how long the lags will be between our policy actions and their impacts on the economy and inflation. This uncertainty argues, then, for policy to be responsive to the data as it emerges, especially as we get within range of the especially as we get within range of the desired policy setting.
(4) Thomas M. Hoenig
President of Federal Reserve Bank of Kansas City
Monetary policy must be forward-looking because policy influences inflation with long lags. Generally speaking a change in the Federal funds rate may take an estimated 12-18 months to affect inflation measures….But the course of monetary policy is not entirely certain. & will depend on how the economy evolves in the coming months.
(5) William Poole*
President, Federal Reserve Bank of St. Louis
However inflation is measured, economists agree that monetary policy has at most a minimal influence on the rate of change in the price level over relatively short time periods—months, quarters or perhaps even a year. Central banks are responsible for medium- and long-term inflation—such inflation, as Milton Friedman wrote, is a monetary phenomenon that depends on past, current and expected future monetary policy. As a practical matter, the medium- to long-term likely is a period of two to five years.
(6) American Bankers Association and America’s Community Bankers
You will note that I am casting my statements about the stance of policy and the outlook in very conditional terms. I do this because of the great uncertainty that surrounds these issues. Frankly, all approaches to assessing the stance of policy are inherently imprecise. Just as imprecise is our understanding of how long the lags will be between our policy actions and their impacts on the economy and inflation. This uncertainty argues, then, for policy to be responsive to the data as it emerges.”
(7) Governor Donald L. Kohn
I think a third lesson is humility–we should always keep in mind how little we know about the economy. Monetary policy operates in an environment of pervasive uncertainty–about the nature of the shocks hitting the economy, about the economy’s structure, and about agents’ reactions. The 1970s provide a sobering lesson in the difficulty of estimating the level and rate of change of potential output; these are quantities we can never observe directly but can only infer from the behavior of other variables.
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First, there is no ambiguity in forecasts. In contradistinction to Bernanke (and using his terminology), forecasts are mathematically “precise” (1) nominal GDP is measured by monetary flows (MVt); (2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits, demand deposit turnover) that matters; (3) “money” is the measure of liquidity; & (4) the rates-of-change (roc’s) used by the Fed are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;
Friedman became famous using only half the equation, leaving his believers with the labor of Sisyphus.
The lags for monetary flows (MVt), i.e. proxies for real GDP and the deflator are exact, unvarying, respectively. Roc’s in (MVt) are always measured with the same length of time as the economic lag (as its influence approaches its maximum impact; as demonstrated by a scatter plot diagram).
Not surprisingly, adjusted member commercial bank free legal reserves (their roc’s) corroborate/mirror both lags for monetary flows (MVt) –– their lengths are identical.
The lags for both monetary flows (MVt) & free legal reserves are indistinguishable. Consequently it has been mathematically impossible to miss an economic forecast. There are no inaccuracies, just some non-conforming & unavailable data This is the “Holy Grail” & it is inviolate & sacrosanct.
The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly. They should represent a rolling moving average.
Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP. Note: roc’s in nominal GDP can serve as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard.
Because of monopoly elements and other structural defects which raise costs and prices unnecessarily and inhibit downward price flexibility in our markets (housing being most notable), it is probably advisable to follow a monetary policy which will permit the roc in monetary flows to exceed the roc in real GDP by c. 2 percentage points. In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels.
Some people prefer the devil theory of inflation: “It’s all OPEC’s fault.” This approach ignores the fact that the evidence of inflation is represented by actual prices in the marketplace. The “administered” prices of OPEC would not be the “asked” prices were they not “validated” by (MVt).
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Dr. William Poole: The depreciation of the dollar is something that is not explicable. And the way I like to phrase this – I like to put my academic hat back on. If you look at academic studies of forecasts of the exchange rates across the major currencies, you find that the forecasts are simply not worth a damn.
Your best forecast of where the dollar is going to be a year from now is where it is now. There is no model that will beat that simple model. And people have dug into this over and over again. Obviously, you can make a ton of money if you were able to have accurate forecasts.
No one has been able to come up with a forecasting methodology that will make you a lot of money. And you can’t make money under the forecast that the dollar is the same as it is right now a year from now. I can go a step beyond that though – and this is what I think is really interesting.
The academic literature is also full of papers trying to explain exchange rate fluctuations after the fact – after you have all the data that you can put your hands on – data that you can’t accurately forecast, but data that after you get your hands on it might logically explain the fluctuations of currency values. And those models aren’t worth a damn either.
We cannot explain the fluctuations of currencies after they have occurred even with all the data that we can dig out. And therefore, to me, it’s completely unsupported idle speculation not only to make the forecast but to talk about why the dollar has behaved as it has.
I know the financial pages and the traders love to talk about that, but I would challenge any of them to construct a model that would stand up to a peer review journal in economics or finance. The models just aren’t that good.”
A post-event question from a Bloomberg reporter: “I was hoping you could elaborate a little bit on the implications of the weakness in the dollar right now… whether implications on inflation or just the economy in general.”
“I don’t see any implications for inflation, at least with the magnitude of the depreciation that we’ve seen so far. The evidence is that – there’s a literature that looks at what’s called “pass through” – pass through of changes in domestic prices. And the evidence is that the pass through coefficient has gotten small and smaller.”
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If the world’s largest economy ($13b+) has a contraction in its economy, imports will fall, & export driven countries will suffer, exacerbating the negative flow of funds, and any currency crisis.
Mexico crisis 2/17/1982 (not identified) – Peso was pegged
Listed below, currency crisis that were predictable & preventable
(1) Black Monday Oct 19 1987 (same day)
(2) Mexico Peso crisis Dec 1994 (2 months early) Peso was pegged
(3) U.S. dollar fall in Mar. 1995 (same month)
(4) Asian financial crisis July 1997 (one month late) – without primary time series
(5) Russian financial crisis 1998 (same month)
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Yea for these, our sterling pieces, all of pure Athenian mold — ARISTOPHANES, THE FROGS
Monetary flows (MVt) peaked Oct. 1974 (the stock market bottom)
Monetary flows (MVt) peaked Oct. 1982 (1 month after the stock market bottom).
(MVt)’s lag for long-term rates peaked Sept. 1981 (this century’s peak in long-term interest rates).
Monetary flows (MVt) peaked in Jun 1984 (the stock market bottom)
Lags are not coterminous, e.g., the stock market bottom of 1982 was identifiable a year and ½, earlier
Go, presently inquire, and so will I, where money is. — THE MERCHANT OF Venice
1938-1940 roc’s in reserves pulled us out of the depression.
1951 (Korean War) had the highest roc’s in inflation & in reserves since WWII.
1973 had the highest roc’s in inflation & the highest roc’s of reserves ever.
1979-1980 had the highest rates of inflation & the highest roc’s of reserves ever.
“Black Monday” Oct. 19, 1987, coincided with the sharpest and fastest peak-to-trough decline in the roc for real GDP since 1915.
The stock market’s 1QTR top in 2000 coincided with a +3.24 (roc) in Dec. 1999, which reversed to -.32 in Feb 2000. An historic reversal.
Feb 27 coincided with the sharpest decline in 1) the absolute level of reserves, & 2) & an historically large peak-to-trough reversal of roc’s for proxies on real GDP & the deflator. The 2/27/07 fall in financial markets was not triggered overseas in China, rather it was Bernanke’s real bills doctrine error which he corrected this year.
The policy rule is ex-post. Bank debits & legal reserves are ex-ante.
Some people think Feb 27, 2007 started across the ocean
http://fraser.stlouisfed.org/docs/MeltzerPDFs/bogsub020538.pdf Member Bank Reserve Requirements; Feb, 5, 1938. “In 1931 this committee recommended a radical change in the method of computing reserve requirements, the most important features of which were…”(2) uniform percentage requirements against the volume of deposits of both types and in all classes of cities; and (3) requirements against debits to deposits.”
There are no monetarists at our universities nor on the Fed’s research staff. There are no monetarists period. Economics is about the rates of change in the flow of funds:
The commercial banks should get out of the savings business (REG Q in reverse). What would this do? The commercial banks would be more profitable – if that is desirable. Why? Because the source of all time deposits is demand deposits – directly or indirectly through currency or their undivided profits accounts. Money flowing “to” the intermediaries actually never leaves the com. banking system as anybody who has applied double-entry bookkeeping on a national scale should know. The growth of the intermediaries cannot be at the expense of the com. banks. And why should the banks pay for something they already have? I.e, interest on time deposits.
From a systems viewpoint, commercial banks as contrasted to financial intermediaries prior to the DIDMCA; (S&Ls, MSBs, CUs), never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing DDs, or TDs or the owner’s equity or any liability item. When CBs grant loans to or purchase securities from the non-bank public (which includes every institution, the U.S. Treasury, the U.S. Government, state, and other governmental jurisdictions) and every person, except the commercial and the Reserve Banks), they acquire title to earning assets by initially, the creation of an equal volume of new money-DDs.
The lending capacity of the member CBs of the Federal Reserve System is limited by the volume of free legal reserves put at their disposal by the Federal Reserve Banks in conjunction with the reserve ratios applicable to their deposit liabilities (transaction accounts), as fixed by the Board of Governors of the Federal Reserve System.
Since 1942, money creation is a system process. No bank, or minority group of banks (from an asset standpoint), can expand credit (create money), significantly faster than the majority banks expand. If the member banks hold 80 percent of all bank assets, an expansion of credit by the nonmember banks and no expansion by member banks will result, on the average, of a loss in clearing balances equal to 80 percent of the amount being checked out of the nonmember banks.
From the standpoint of the individual commercial banker, his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, and probably its free legal reserves, not a tax [sic] – and thereby it’s lending capacity. But all such inflows involve a decrease in the lending capacity of other commercial bank (outflow of cash and due from bank items), unless the inflow results from a return flow of currency held by the non-bank public, or is a consequence of an expansion of Reserve Bank credit. Hence, all CB liabilities are derivative.
That is, CB time/savings deposits, unlike savings accounts in the “thrifts”, bear a one-to-one relationship to demand deposits. As TDs grow, DDs shrink pari passu, and vice versa. The fact that currency may supply an intermediary step (i.e., DDs to currency to TDs, and vice versa) does not invalidate the above statement.
Monetary savings are never transferred to the intermediaries; rather monetary savings are always transferred through the intermediaries. Indeed, as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that savings can be “attracted” from the intermediaries, for the funds never leave the commercial banking system.
Consequently, the effect of allowing CBs to “compete” with S&Ls, MSBs, CUs, MMFs and other intermediaries has been, and will be, to reduce the size of the intermediaries (as deregulation did in the 80’s) – reduce the supply of loan-funds (available savings), increase the proportion, and the total costs of CB TDs.
Contrary to the DIDMCA underpinnings, member commercial bank disintermediation is not, and has not been, predicted on interest rate ceilings. Disintermediation for the CBs can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction, as a consequence of currency withdrawals. The last period of disintermediation for the CBs occurred during the Great Depression, which had its most force in March 1933. Ever since 1933, the Federal Reserve has had the capacity to take unified action, through its “open market power”, to prevent any outflow of currency from the banking system.
However, disintermediation for financial intermediaries-S&Ls, MSBs, CUs, etc., is predicated on their loan inventory (and thus can be induced by the rates paid by the commercial banks); earning assets with historically lower fixed rate and longer term structures. In other words, competition among commercial banks for TDs has: 1) increased the costs and diminished the profits of commercial banks; 2) induced disintermediation among the “thrifts” with devastating effects on housing and other areas of the economy; and 3) forced individual bankers to pay higher and higher rates to acquire, or hold, funds.
Savers (contrary to the premise underlying the DIDMCA in which CBs are assumed to be intermediaries and in competition with thrifts) never transfer their savings out of the banking system (unless they are hoarding currency). This applies to all investments made directly or indirectly through intermediaries. Shifts from TDs to DDs within the CBs and the transfer of the ownership of these DDS to the thrifts involves a shift in the form of bank liabilities (from TD to DD) and a shift in the ownership of DDs (from savers to thrifts, et al). The utilization of these DDs by the thrifts has no effect on the volume of DDs held by the CBs or the volume of their earnings assets.
In the context of their lending operations it is only possible to reduce bank assets and DDs by retiring bank-held loans, e.g., the only way to reduce the volume of demand deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.
The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can make loans (if monetary policy permits and the opportunity is present) which amount to server times the initial excess reserves held.
Financial intermediaries lend existing money which has been saved, and all of these savings originate outside the intermediaries; whereas the CBs lend no existing deposits or savings; they always, as noted, create new money in the lending process. Saved DDs that are transferred to the S&Ls, etc., are not transferred out of the CBs; only their ownership is transferred. The reverse process, which is called “disintermediation”, has the opposite effect: the intermediaries shrink in size, but the size of the CBs remains the same.
Professional economists have no excuse for misinterpreting the savings investment process. They are paid to understand and interpret what is happening in the whole economy at any one time. For the commercial banking system, this requires constructing a balance sheet for the System, an income and expense statement for the System, and a simultaneous analysis of the flow of funds in the entire economy.
From a System standpoint, time deposits represent savings have a velocity of zero. As long as savings are held in the commercial banking system, they are lost to investment. The savings held in the commercial banks, whether in the form of time or demand deposits, can only be spent by their owners; they are not, and cannot, be spent by the banks. CB deregulation created stagflation.
From a system standpoint, TDs constitute an alteration of bank liabilities, their growth does not per se add to the “footings” of the consolidated balance sheet for the system. They obviously therefore are not a source of loan-funds for the banking system as a whole, and indeed their growth has no effect on the size or gross earnings of the banking system, except as their growth affects are transmitted through monetary policy.
Lending by intermediaries is not accompanied by an increase in the volume, but is associated with an increase in the velocity of money. Here investment equals savings (and velocity is evidence of the investment process), where in the case of the CB credit, investment does not equal savings but is associated with an enlargement and turnover of new money.
The difference is the volume of savings held in the commercial banking system is idle, and lost to investment as long as it is held within the commercial banking system. Such a cessation of the circuit income and transactions velocity of funds, funds which constitute a prior cost of production, cannot but have recessionary effects in our highly interdependent pecuniary economy. Thus, the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on GDP and the level of employment (structural changes have reduced the validity of this last conclusion. Under existing institutional arrangements, an increase in time deposits results in an offsetting increase in transactions velocity – therefore no dampening effect results. If there is to be a growth in time deposits there should be an offsetting increase in velocity)…
It began with the General Theory, John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”
In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make the statement correct. Perhaps this is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, Reg Q, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, etc.
Don’t underestimate Bernanke. We haven’t had anyone as good since Martin.
The worst Chairman:
(1) Paul Volcker
(2) Alan Greenspan
(3) Arthur Burns
(4) William Miller
There is no answer because we don’t know what the question is. The phantom debt as I think you called it earlier is truly that. Where it is, what it is, the extent of leverage, errors in mathematical models, etc. have taken the game away from the Fed and the rest of our financial institutions. Whatever honest prudent adults there are failed to stop the madness because too much money was being made.
This is still largely above the consumer’s head, but over time will be on the consumer’s head, and then in the consumer’s head.
To throw a couple of quicky quotes:
Heraclitus- man is the measure of all things
Marx- Labor theory of value.
This has been a great thread. I’ll finally get to read Eclectic’s thesis.
Winston said
>>to unwind the effects of fiat-debt monetary policy, it is critical to start from the perimeters and work inward,
I believe that the mentioned approach is an attempt at this with the ultimate outcome, given the inherent flaws to morph as a bottom up approach to the end of fiat as market forces will prove it to be inferior. Short of waiting for systemic collapse this would appear the only logical direction toward transition.
Maybe I have missed something in the posts but still fail to see a reference to viability of the concept.
Eclectic
I never suggested that the raw principles cited in your hypothesis were in any way in conflict with anything Dr. Paul asserts, quite the contrary; I’m looking for your analysis of the mechanics of the solution proposed, in the context of your hypothesis.
Why would >>”spirit of cooperation” be necessary for people to see the advantages of storing wealth in an appliance of intrinsic value, provided the value is not taxed or manipulated eroding the confidence of it as a monetary device as in the fiat unit.
With regards to David’s critique, its difficult to ascertain if I provided him with enough of your work for accurate dissemination. As it regards myself, I have no formal education in economics, much of what you write is esoteric from my perspective. I understand what was written in his critique due the language. I understand what you are attempting to articulate is a theorum which must be true in all situations, for the layman, though what you write is likely accurate the message is obscure. This gentleman seemed to have a good grasp of the language and concepts and still your ideas were not interpreted correctly.
Maybe there exists a more complete transcription with examples of these concepts in one place.
Flow5
Your post is long and references regulations and processes that I will need to familiarize myself with in order to understand why you are in agreement with the view I have developed. I will do this in the comming week.
Stormrunner wrote,
“Maybe I have missed something in the posts but still fail to see a reference to viability of the concept.”
Sorry if I didn’t respond directly, but my consideration is not whether or not this idea is viable but whether or not it is necessary.
It does not address the primary problem, and that is the government’s ability to issue an unlimited amount of debt. Congress, the Federal Reserve, and the Department of the Treasury have no fractional reserve requirements, and therefore the proposed changes do not alleviate the basic problem.
“We have met the enemy, and he is us.” Pogo
Winston
In a round about sort of way yes it does. A competing currency gives users a chance to decide how they wish to hold their wealth in other non taxable forms. This is being sold as the mechanism which will restrain the growth of fiat. If for some reason this makes no sense then Ron Paul’s monetary platform is without merit and the support response is nothing more than adulation.
This is the point of the question about just another layer of obscurity. Truth and honesty are entirely two different things just because he believes this will work does not mean it can.
If you believe it does not address the open check book issue, service possable via only two mechanisms, taxation and the hidden tax of inflation. If people have an alternative to the government issue would the FED not be destroying their own unit in shorter order but not managing it properly. What is being attempted here is a free market competition in local currency ending the monopoly which should make regulation and oversight less of an issue almost self regulating in a sense if I understand it correctly and have heard it sopken as such in his interviews.
Remember these are not my ideas but components of a campaign platform. This issue is complex or maybe not, this is the question.
Winston, interesting quote re consumer spending vs other factors, but business investment generally depends in significant part on the expectations/projections of consumer spending. It would seem there is a push-pull. If so, then at a giving moment in time, one factor or the other may be the more telling. At the moment businesses must consider more carefully than usuall how well consumer spending will hold up. They will use a mix of their expectations along with the current actual trend. But this has gone on a while now. It’s one reason (due to caution) that productivity has had an extra impetus.
flow5,
If you’ve been attempting to defend the Fed from now-widespread and growing claims of their incompetence relative to the housing fiasco, by referencing statements originating from members of the FOMC (and other pertinent commentators) of the uncertainty principles of economic forecasting, you might be convincing in some academic realm, but not to the many who have long observed the slow-motion catastrophe as it developed.
You also didn’t hear Greenspan admit to the enjoyment he experienced in using his tubbing sessions to, by candlelight I presume, plan his tortured obfuscations of Congress with.
No, the Fed failed us.
And, too, if you consider Volcker to have been the worst chairman, or one of the worst, then you are beyond all hope of being convinced that the Fed failed us regarding this crisis. I don’t mean to make so profound a judgment about Bernanke’s current term as chairman. Time will tell on that matter.
—
Zell,
And well you should read it my friend, all of it. If you do, and if you understand it, there will come a moment in which you won’t feel your feet.
—
Storm,
The mechanism you want me to explain is that there is-no-mechanism inherent in monetarism that can cure severe recessions when they occur. My hypothesis and writing simply work to explain why monetarism can’t stimulate an economy when monetary policy becomes non-linear after some event that drives my Coefficient Of Perceived Liquidity high enough to cause widespread substitution of nominal liquidity by perceived liquidity.
That substitution obviates nominal monetary policy. I have explained it in psychological terms that redefine money, not as Keynes and others attempted to explain it with emperical discussions centered on nominal money. I haven’t adapted this to policy because the biggest battle I have is just to explain it.
Regarding your question on the nature of “spirit.” I’ve already explained to you in my critique of the potential legislation you linked in a prior topic that the intended utilization of monetary policy under the proposal is just as apt to be abused for polical reasons as the current one is. If you remember, I asked rhetorically about Katrina and whether it would’ve been necessary politically to make one of those emergency monetary “3%” injections because of it. No, a monetarist is just a monetarist and the Paul plan would just be a horse of a different color.
If the nation were fiscally responsible enough in the aggregate to accept Paul’s overtures, it would be fiscally responsible enough to cure and use the system we have now. This is now the third time I’ve answered your question, twice without you asking it, and now this final time when you asked it specifically. I’m not being critical of you, but just observing that it’s evidently a point you are not willing to accept.
Storm,
Here’s where I critiqued the entire piece of potential legislation (for a new ex-debit monetary system) that you linked for us in a prior topic:
http://bigpicture.typepad.com/comments/2007/07/hulberts-4-big-.html
Eclectic, I have read, reread and submitted to others for comment most of your ideas. If have missed anything it is surely a comprehension issue more than neglect.
My question could not have been more direct. The MRA Act I asked you to critique, is now dead (to me that is) and I’ve stated as much in this thread
>>my opinions regarding a solution after much thought in other threads are actually leaning away from chartalism or neo-chartalism toward simply removing the tax and monetizing PM’s, it s simple non intrusive, no peg required, vehicle for storage/exchange exists in free-market forms such as E-Gold, others would undoubtedly arise.
No injury intended but I believe you are assuming you understand the current question as some extension of a topic already addressed, this is not so, or again I am being obstinate and reckless in parsing your comments.
Chartalism and Ron Paul’s monetary platform are at completely opposite ends of the spectrum, like implying fission and fusion are the same due to the explosive characteristic. Paul does not endorse fiat of any kind nor does he wish to eliminate it, He simply wishes to introduce c-o-m-p-e-t-i-t-i-o-n,(note without the peg) the simplicity of which could be brilliance or folly. He does not endorse a strict Old-World Gold Standard, I have heard him speak only to that which I have indicated above. Please excuse my frustration, your answer may in fact be the same, but intuitively, I have a tendency to doubt this. I think the plan also addresses Winston’s open check book issue. So I will reiterate once more
Legalize gold and silver as legal tender effectively removing the tax on nominal appreciation.. People could trade directly using their PM accounts such as E-Gold or they could convert gold to fiat to fill their demand deposit accounts with the fiat necessary to transact business. Fiat in its current form does not change in any way. The competition introduced effectively limits inflating away peoples savings to finance the machine, raising taxes would now become necessary to spend future money previously intended to be financed with monetary inflation. Now you could argue that this is merely a tax free investment vehicle similiar to a Roth IRA but others would argue that items priced in terms of Gold (sound money) are relatively stable with less risk over a long time frame.
Please address this and forget about chartalism the flaws are nearly identical I’ve gotten this for some months.
Eclectic, a careful reading of my statements will reveal no such bias towards the Fed.
My reasoning was that Volcker’s error was strait forward. Greenspan created the biggest disaster but it sucked EVERYONE in until it was too late. And Ron Paul is indefensible.
In 1980, Paul Volcker, Past chairman of the Board of Governors of the Federal Reserve System, appeared before the House Domestic Monetary Policy Subcommittee. In response to a question as to why the Fed had supplied an excessive volume of legal reserves to the member banks in the third quarter 1980 (annual rate of increase 13.2%), Volcker’s defense was that there are two types of legal reserves: 1) borrowed (reserves obtained by the banks through the Federal Reserve Bank discount windows), and 2) non-borrowed (reserves supplied the banking system consequent to open market purchases). He advised the congressmen to watch the non-borrowed reserves — “Watch what we do on our own initiative.” The Chairman further added — “Relatively large borrowing (by the banks from the Fed) exerts a lot of restraint.”
This is of course, economic nonsense. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in 15 days was immaterial. A new advance can be obtained, or the borrowing bank replaced by other borrowing banks. The importance of controlling borrowed reserves was indicated by the fact that at times nearly 10% of all legal reserves were borrowed. I rest my case.
Discussions of interest, especially short-term rates, are usually couched in terms of the “money market”. As long as this is just a “street-wise” expression confined to the business community, no harm is done. Unfortunately, under the influence of the Keynesian dogma, academicians have been trying for too long to analyze interest rates in terms of the supply of and demand for money. A “liquidity preference” curve is presumed to exist which represents the supply of money. In this system interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity. All of this has little or nothing to do with the real world, a world in which interest is paid on checking accounts.
Interest, as our common sense tells us, is the price of obtaining loan funds, not the price of money. The price of money is the inverse of the price level. If the price of goods and services rises, the “price” of money falls. Interest rates in any given market at any given time are the result of the interaction of all the forces operating through the supply of and the demand for, loan funds.
Loan funds, of course, are in the form of money, but there the similarity ends. Loan funds at any given time are only a fraction of the money supply — that small part of the money supply which has been saved, and is offered in the loan credit markets.
Unfortunately, Keynesian economists have dominated the research staffs of the Fed as well as the halls of academia. While monetary policy is formulated by the Federal Open Market Committee (FOMC), monetary procedures are determine by the “academic” research staffs. In their world, high interest rates are evidence of “tight money”, low rates of “easy money”; and, a proper rate of growth of the money supply is obtainable by manipulating the federal funds rate. Consequently, to bring interest rates down the money supply should be expanded and vice versa.
The only instance in which an expansion of the money supply is synonymous with an increase in the volume of loan able funds involves an expansion of commercial bank credit. When the depository institutions make loans to, or buy securities from, the non-bank public an equal volume of new money (demand deposits) is created. This expansion is made legally possible le by a growth of legal reserves (and excess reserves) in the banking system, which in tern is the consequence of net open-market purchases by the Reserve banks.
To increase the volume of legal reserves in the member banks, the Fed buys governments, (usually T-Bills) in the open market in sufficient quantity to more than offset all legal reserve consuming factors (e.g., the withdrawals of currency from the banks by the non-bank public). These purchases tend to increase the price of bills, thus reducing their discounts (interest rates). The incremental reserves also add to excess reserves thus enlarging the supply of “federal funds”. Federal funds rates are thus held down, or are prevented from rising.
The long-term effects of these operations on short-term rates are just the opposite. The banks are able to (and do) expand credit on a multiple basis relative to the additional excess reserves. This “multiplier effect” on the money supply, and money flows, puts additional upward pressure on prices. The long term effect, therefore, is higher inflation rates, and a higher “inflation premium” in both short and long-term interest rates.
Higher interest rates consequently are not evidence of “tight money”; rather they are the consequence, over time, of an excessively easy (irresponsible) money policy – money expansion so great that monetary flows (MVt) substantially exceed the rate of expansion in real output.
While interest rates are not determined by the supply of and the demand for money, changes in thee volume of money and monetary flows (MVt), as noted above, can alter rates of inflation and, therefore, the supply of and the demand for loan-funds.
The significant effects of these monetary developments are long-term and involve an alteration in inflation expectations. Inflation expectations operate principally through the supply side for loan-funds. Specifically, an expectation of higher rates of inflation will cause the supply schedules of loan funds to decrease. That is to say, lenders will be willing to lend the same amount only at higher rates.
Inflation expectations and the expected volume of federal deficit financing now represent the principal factors determining long-term interest rates. If current projections of federal deficits materialize in this and the next few years, interest rates (both long and short-term) will be driven up sharply by the increased demand for loan funds. Any recovery in the economy will present a “catch 22” situation. An upturn in the economy will add increased private demand for loan funds to the insatiable demands of the federal government. The consequent rise in interest rates will effectively abort any recover.
In fact, no sustained business recovery can occur if interest rates even remain at the present high levels. It is absolutely essential that interest rates be brought down. This requires the Fed’s maintaining the relatively tight money policy it has followed since Feb. 06. The Administration must take the necessary fiscal measures to reduce the actual deficits at least 70-80% below the projected levels (assuming the payments gap is not filled by foreigners). Raising taxes to accomplish this objective would be counter-productive. A drastic reduction in government expenditures below the projected levels is the only path to pursue if we are to avoid an unprecedented period of stagnation.
The Housing Bubble & Greenspan’s Conundrum
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Bank Credit increased by a factor of 2.7x from 04/01/89 to 11/01/07. The monetary significance of such a vast growth in bank credit derives from the fact that commercial banks create new money (initially demand deposits) on a dollar-to-dollar basis when they make loans to, or buy securities from, the nonbank public. Since commercial banks create new money (demand deposits) why didn’t demand deposits increase by over 764b rather than 15b in this period? The answer: largely because of the massive diversion of approximately 202b of demand deposits into time deposits (less the expansion in bank net worth & the sale to the public of various types of non net-worth securities). Demand deposits were also reduced by an expansion of 547b in the nonblank public’s holding of currency.
The point is the DIDMCA of March 31st 1980 allowed the (thrifts) S&Ls, MSBs, & CUs the option to classify any or all of their deposits as checking accounts. This resulted in legalizing the universal use of drafts to transfer the ownership of share and savings accounts. Therein lies the problem. In the process of converting these institutions into commercial banks there was an unquantifiable diversion of newly created money (demand deposits) into time/savings deposits at what were formerly financial intermediaries. This is the reason why the supply of money became unknown & unknowable. The growth rates in the supply of new money and credit were obscured by both the diversion of money into savings/time deposits and as to whether bank liabilities originated from the outside of these new depository institutions (an increase in the supply of loan-funds) or from within these banks (an increase in newly created money). And this is the underlying reason why Greenspan was oblivious to the origins/signs of inflation which were ultimately responsible for the housing catastrophe. I.e., monetary policy seemed to reflect a total myopia concerning these developments.
During this period newly created demand deposits were diverted into time deposits; not because they were saved, but because of the structural changes in the banking sytem that made most of these time deposits a type of auxiliary money. It should be remembered that there is a one-to-one relationship between time & demand deposits. An increase in time deposits depletes demand deposits by the same amount, either directly or via the currency route, and vice versa.
These unique, and inflation-causing changes in monetary policy and the structure of the banking system were the consequence of an almost universal misconception of the economics of time deposit banking, and the basic differences between commercial banks and the financial intermediaries.
This massive diversion of demand deposits into time deposits was wholeheartedly supported by the bankers, sanctioned by the monetary authorities, and “sanctified” by the Keynesian theories held by virtually all economicsts. Keynes’ General Theory of Employment, Interest and Money (1936) was their bible. On page 81 of Macmillian’s 1949 edition, Keynes informs us that it is and “optical illusion” to suppose “…that a depositor & his bank can somehow contrive betwen them to perform an operation by which savings can disappear into th banking sytem so that they are lost to investment…”.
The Fed ignored transactions velocity (it’s no longer published), and based its open market policy on the spurious assumption that the proper volume of money could be achieved through the manipulation of the federal funds rate. Not only did this Fed policy result in the pumping of an excessive volume of legal reserves into the banking system, but also the base for monetary expansion was further enlarged by extensive reductions in the assets eligible for reserve requirements (through an unprecedented increase in the money multiplier).
Time deposits standing alone are not inflationary. In fact, they are the equivalent of demand deposits with a transactions velocity of zero. But they are inflationary when they become in effect interest-bearing demand deposits. Neither the bankers nor the Fed seemed to realize the economics of making time deposits so liquid that they were, for all practical purposes, a net addition to the effective money supply (auxiliary money).
The inflationary impact of these monetary flows is not revealed by either the producer or consumer price indexes. They relect, in only a marginal amount, the inflation that has taken place in real estate. Soaring real estate prices have been “validated” by these enormous flows, and have provided most of the inflation premium which has propelled this asset bubble. Rampant speculation and a deluge of irresponsible borrowing and lending have, as a consequence, characterized the industry.
Thus far, the Fed has been able to maintain the liquidity credibility of the banks and thrifts. How long can this necessary degree of confidence be maintained? There is no answer but the crucial test is yet to come.
The Fed cannot dig us out of this hole, although the Federal Reserve Banks could buy up the entire federal debt since Fed credit creation is no longer constrained by gold or gold certificate reserve requiements or reserve ratios. The Fed could, but it dare not. Even if the reserve ratios (minimum ratios of legal reserves to bank deposits) were raised to 100%, the debt would be monetized to the extent to which the Federal Reserve Banks increased their holds of governments. That is to say, the public’s holdings of money increases pari passu with the expansion of Reserve Bank credit. Furthermore, by raising reserve ratios to 100%, the commercial banks would become financial intermediaries no longer able to create money, serving only as conduits between savers and borrowers.
Storm,
I don’t support any radical changes made to the Federal Reserve system, regardless of who suggests them. What I critiqued is closely enough to the general thrust of Paul’s ideas so that my critique was directed towards him. He wants the Fed out of the credit creation business, and I only want the system to work the way it was designed to work, with appropriate supervision.
Using a gold or other precious metal standard for legal tender would be a disaster. It won’t ever happen. Period. No urbanized labor-specialized society could survive a gold standard.
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flow,
It’s too hard to get a grasp on just what it is that you do support, since you’ve published a couple of phone books without any sort of organized introduction to what it is you’re trying to say.
I didn’t suggest there would be any radical changes, as a point of fact I said there would be no changes at all to the FED system. The single one and only change would be to remove the tax on the nominal appreciation of gold. The other mechanism (gold check book money)already exists people already barter through gold accounts. E-Gold
>>Using a gold or other precious metal standard for legal tender would be a disaster.
without a gold-dollar peg I’m not sure in a free float your limited supply issue is relevent. On this I could be mistaken.
Maybe by “It won’t ever happen. Period. ” you mean the gub will never get its greedy invisable hands out of people pockets (eliminate a tax on anything), on that point I’m sure you’re more than likely correct.
No apology. My views aren’t peripheral. I preach the gospel. Understanding sometimes means doing some homework
Flow5
What is your opinion is this supposed free-market solution to the monopoly that is the FED. Is there any merit to trying to provide competition to reign in on excess??
Your explaination of the system workings seem similar,however the “Gate” class version, to the rudimentary concepts espoused in “Money as Debt” in so far as the closed loop big picture single entity hub and spoke construct, where for the most part a greater percentage of funds never leaves the system, ledger entries being all that is necessary to support flow.
As indicated I will review the specifics of the legislation indicated to get a better handle on what you are presenting.
Mostly I am trying to formulate an opinion from the expression of others.
I’ve yet to get a direct answer as to why removing the taxation on nominal increase in PM values could not work. All these posts on a simple solution to a complex problem, just dismissal, but maybe this is precisely what this proposal deserves, in which case it is dangerous to delude people into believing fantasy and better to argue for oversight. —100 years of oversight have produced a dollar with the purchasing power of a nickle and no accurate accounting of sovereign gold reserves.
“removing tax on nominal increase in PM values” I don’t have a satisfactory answer on this question. I’ve not read much on this subject. How will asset values be evaluated? “Black market” values might be encouraged???
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We live in a predatory society and we operate under “regulated capitalism”. The regulatory decisions which channel our savings & investment into the most appropriate areas of our economy is entrusted with our legislators.
Our money and savings require a special fiduciary relationship on the part of depository institutions, financial intermediaries, and all other involved institutions. It cannot be fostered by deregulation. The scope of the operations of these institutions must be severely circumscribed and subject to rigorous and informed supervision.
In retrospect, the money markets should have been subject to more intense, not less, regulation. In re-organizing our financial institutions the first requirement is to recognize that the competitive freedoms of the mercantile marketplace cannot be applied to the institutions that create our money, or protect our savings. More that 75 years ago this wisdom was recognized by the inauguration of the FDIC (Banking Act of 1933), the FSLIC (National Housing Act of 1934) and many other changes in our banking structure.
Deregulating financial institutions to the extent that they have been deregulated, was an invitation to financial disaster.
Deregulation is a disease.
flow5,
You’re making some sense. So, why didn’t you preach those few paragraphs before the telephone books?
Genesis before Leviticus, Numbers and Deuteronomy makes for a better tent meeting.
Flow5 wrote,
“Deregulating financial institutions to the extent that they have been deregulated, was an invitation to financial disaster.”
Exactly and Amen, Brother!
You also alluded to another concept that I will paraphrase: Pure capatilism is the Law of the Jungle, i.e., survival of the fittest at the expense of the weak.
The only trickle-down we have seen from wealth-side economics is the trickles of blood and sweat from the working class as worldwide wage arbitrage has negated their bargaining power.
The remnants of the Grapes of Wrath have been squeezed into Cabernet Savignon, sipped by the elite at auctions while bidding on tomato soup can art.
>>Deregulation is a disease.
Given the current environment this is a priori.
In a true free market economy competition is the mechanism of efficient resource allocation. The issue is one of a level playing field so as that emerging technologies are not hampered by existing monopolies with the power to legislate their own subsidies. Power accumulated due to the siphoning effect of fiat.
People thinking outside the box are obviously attempting to design a regulating mechanism that does not require complex legislation, the layers of which will ultimately be repealed or replaced due to the power of lobby or pandering to constituency. Take the “Secure Borders Initiative” enacted due to over whelming support but gutted effectively by the recent spending bill, hundreds of pages received a day or two in advance of needed passage. The tricks and fraud will never cease.
If the fiat is managed responsibly, a conduit for competition should provide no threat, the inconvenience of the conversion will deter its use. If removing the tax on nominal appreciation of gold and or silver were to be implemented I’m not talking about coining PM’s, without having read some in depth analysis and only considering this single implementation, in what ways would/could this be detrimental or simply ineffective. This one action is being discussed as a panacea for the monopoly that is the FED. Simply to state that one does not support radically changing the FED system is disingenuous, unless one believes removing this tax is radical. Would this not be a form of regulation as the platform contends? I’m not making any claims to the viability or effectiveness, the claim of the previous -is- simply the basis for the query.
With the exception of hyperinflation, all the “flations” are the consequence of “too much money chasing too few goods and services”, or the opposite. Inflation represents a chronic “across-the-board” increase in prices, or, looking at the other side of the coin, depreciation in money. If the depreciation of money is the consequence of a loss of confidence in the credit worthiness of the government, we have hyperinflation. The ultimate hyperinflations result when the existing government is destroyed, making its currency worthless – a 100 percent depreciation. There are, of course, degrees of hyperinflation.
It is a truism that if the flow of money in the market place increases relative to the flow of goods and services offered for sale, prices on the average will rise. Therefore, to say that a cartel or monopoly that posts a higher “administered” price causes inflation has to be premised on the assumption that the monetary authorities respond to such price fixing practices by increasing the volume of money and/or the public responds by increasing the rate of flow (transactions velocity) of money. The same reasoning applies to increases in wages achieved through the monopoly powers of a union. These price increases will result in a transfer of purchasing power and wealth to the groups with dominant economic powers. The resulting price distortions will weaken and depress the economy, increasing unemployment and ultimately creating a deflationary effect.
If the response of the monetary authorities is to provide additional legal reserves to the banking system, resulting in an expansion of bank credit and the money supply, other prices will rise and the monopolistically created prices will be “validated”. This obviously may lead to an “administered” price —credit money spiral, and we have the core of chronic inflation. If the monetary authorities try to compromise the situation and reduce the rate of inflation, we end up with stagflation. But this is preferable to an all out monetary effort to create full employment irrespective of the inflationary effects. For if the rates of inflation increase, so will interest rates; and high interest rates alone are a sufficient factor to induce a severe recession or even a depression.
In other words, the powers of the Fed are limited. The solution to this problem is to eliminate, or sharply reduce the economic powers of monopolies, oligopolies and any other form of concentration of economic power. How to do this without the creation of an authoritarian state has yet to be discovered.
The “money multiplier” has doubled since 1/1/2000. When the Financial Services Regulatory Relief Act of 2006 takes effect in 2011, The Fed will be conducting open market operations of the sellilng type. What are you going to say then?
The Fed, though intended to be an “independent” agency has, like the Supreme Court, “followed the elections”.
We don’t have captialism, we have regulated capitalism.
We have an “elastic” currency “aided and abetted” by “elastic” legislators. We have perennial Walter Wriston caricatures pressuring the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs. We have a conspiratorial organization that goes by the name of the American Bankers Association – with its well funded lobbyists.
The Board of Governors is self-described as: “subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute” Even so, the Fed is “connected at the hip” with Congressional allies, a la Greenspan, who the New York Times called a “three-card maestro”.
The Fed’s research is politically coordinated, targeted to justify its monetary policy objectives – those that appease the banking community. It’s as the university professor said: “innovate away from home”. Academic freedom has become the “barbarous relic”.
The great German poet and playwright Bertolt Brecht would have agreed and once said it was “easier to rob by setting up a bank than by holding up (one).”
What should be done? As a long-term proposition, the Federal Reserve should re-apply and then gradually lower REG Q ceilings until the commercial banks are out of the savings business. Outside of the commercial banks, interest rates would be left to the market place. What would all of this do? The commercial banks would be more profitable – if that is desirable. Why? because the source of all time deposits is demand deposits directly via the currency route or through the commercial banks undivided profits accounts. Money flowing “to” the intermediaries actually never leaves the commercial banking system as anybody who has applied double-entry book-keeping on a national scale should know. The growth of the intermediaries cannot be at the expense of the commercial banks. And why should the banks pay for something they already have? I.e., interest on time deposits
If you think anyone understands Money & Central Banking, think again.