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The Voodooest Economics of Them All
If you've successfully managed to keep your breakfast down for this long, don't read this Bloomberg News analysis of the bailout extravaganza. Your lead paragraph:
The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.
Gulp. Ignore the misuse of the word "rescue," and the challengable assertion that you couldn't get credit in August of 2007, and plow ahead into one of the most gruesome tabulations since the Jonestown Massacre (or the Brian Jonestown Massacre, for that matter):
The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14. [...]
President Franklin D. Roosevelt's New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government's current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office.
The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.
In other words, comparing the other government interventions during our lifetimes to what we've seen in the Late BushCapitalism era is like comparing fleas to an elephant. Well, at least they're being transparent about it!
Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.
Collateral is an asset pledged to a lender in the event a loan payment isn't made.
"Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting," Bernanke said Nov. 18 to the House Financial Services Committee. "We think that's counterproductive."
reason on the bailout here.
|11.24.08 @ 11:15AM|#
Our economy is a junkie. It only feels good when we inject money into it. We need bigger and bigger injections more and more often just to feel less bad. We're getting close to overdosing.
Vinny|11.24.08 @ 11:17AM|#
Ho. ly. shit.
I apologize for the strife I have stoked among my fellow
libertarians. No matter your persuasion, if you are American, we
have a common enemy: the Treasury.
EJM|11.24.08 @ 11:22AM|#
The related
post at FP's "Passport" also flagged this quote from the
story...
The money that's been pledged is equivalent to $24,000 for
every man, woman and child in the country. It's nine times what the
U.S. has spent so far on wars in Iraq and Afghanistan, according to
Congressional Budget Office figures. It could pay off more than
half the country's mortgages.
NJ|11.24.08 @ 11:25AM|#
This is beyond surreal. How in the world are we going to pay for all of this.
|11.24.08 @ 11:29AM|#
I'm getting the sense that the guys at the top either know this is all just smoke and mirrors, or else they have no idea what is going on at all and are just making shit up.
nj|11.24.08 @ 11:32AM|#
I guess the best way to look at this is that in the long run, we are all dead.
squarooticus|11.24.08 @ 11:33AM|#
No matter your persuasion, if you are American, we have a common enemy: the Treasury.
It should be abundantly clear by now that our common enemy is a
currency that governments can print at will. Without that problem,
there would be no bailouts because there would be no way to pay for
them.
How in the world are we going to pay for all of this.
Inflation. There's no other possible answer. Tax revenues simply
cannot get grow enough to pay the debt: the peak of the Laffer
curve (resulting largely from capital flight to more friendly
jurisdictions) is far to the left of the tax rate that would be
required.
If you haven't done so already, come up with a plan *now* to
preserve your wealth. If you are on a fixed, dollar-denominated
income (such as a pension or Social Security) then you, like my
parents, are screwed. Sorry to hear it, but you reap what you
sow.
|11.24.08 @ 11:34AM|#
I guess the best way to look at this is that in the long
run, we are all dead.
Won't somebody please think of the children?!?!
I mean, we are all someone's children.
|11.24.08 @ 11:34AM|#
Welcome to Bush-league communism, bitches.
Please don't have my family shot or sent to Florida, Comrade
Bush.
|11.24.08 @ 11:34AM|#
Since we're only loaning the money to the banks, I'm going to be charging points to those bitches.
|11.24.08 @ 11:37AM|#
The aggregate balance sheet destruction caused by the crisis
(which is really just massive credit deleveraging) can be entirely
soaked up by the government using the Feds balance sheet. Is this a
terrible situation? Yes. Is it better than letting 60-80 of banks
and maybe 20-50% of companies go bust? Probably - yes. At least in
the short term (2-10 years).
Nothing will ever get "paid for" because ultimately, private credit
will be replaced by government debt, and then inflated away.
Lesson? By TIPS.
Abdul|11.24.08 @ 11:40AM|#
"Some have asked us to reveal the names of the banks that
are borrowing, how much they are borrowing, what collateral they
are posting," Bernanke said Nov. 18 to the House Financial Services
Committee. "We think that's counterproductive."
He has a point in that the bailout is supposed to prop up
confidence in banks. If people find out certain banks are recieving
lots of welfare the bank will lose consumer confidence. Consumbers
will get the heebie-jeebies and pull out deposits, short the share
price, and then Uncle Sam will look stupid because he just put
billions of capital into the bank only to cause its failure instead
of preventing it.
SIV|11.24.08 @ 11:41AM|#
they have no idea what is going on at all and are just
making shit up
Correct
Both Bernancke and Paulson have admitted as much.
Geithner has been the third person at all their meetings so Obama
clearly intends to maintain the continuity of Bushonomics.
Insert Warrenisms here:
|11.24.08 @ 11:44AM|#
Since we're only loaning the money to the banks, I'm going
to be charging points to those bitches.
Personally, I've always wanted to charge my bank some exorbitant
late fees.
|11.24.08 @ 11:47AM|#
He has a point in that the bailout is supposed to prop up
confidence in banks.
Exactly. In fractional reserve banking the purpose of banks is to
create credit. Banks are always and everywhere theoretically
insolvent at ALL TIMES even if they are functionally solvent for
periods of time. Confidence in banks is ever necessary, and ever
foolish.
Bubbles and busts are created by credit - but so is enhanced
economic growth. The alternative is narrow banks, high interest
rates, zero growth except via technological advances which become
ever more difficult to fund.
SIV|11.24.08 @ 11:50AM|#
domo,
If they try to inflate the debt away they won't be able to afford
financing any new debt at inflationary rates (or refinancing of the
old)
ZIRP forever and a deflationary spiral.
I do suppose World War or a default are still options, but a
default would be messy.
DOOOOM
KenK|11.24.08 @ 11:52AM|#
I think we will see a bit of deflation but once (if???) the
economy recovers at all we will see raging inflation, the likes of
which have never been seen in the USA.
If you aren't on LIFO for inventory valuation I would suggest you
get on it. And get ready to use NIFO for pricing.
|11.24.08 @ 11:58AM|#
SIV,
If they try to inflate the debt away they won't be able to
afford financing any new debt at inflationary rates (or refinancing
of the old)
You would be dead ass right if the market wasn't pricing in
deflation for the next 7 years. Right now, the government has to
pay 2.13% to borrow for 5 years OR 3% PLUS whatever inflation ends
up being. So it's cheaper to borrow "unsecured" (in an inflation
sense) than secured (using inflation indexed bonds).
Once the treasury actually starts auctioning debt by the trillion -
surely rates will rise, but not nearly as much as they will AFTER
inflation kicks in. This situation has occurred because, right now,
the treasury is the only borrower that the market believes will
actually return the principle with probability of 1 - and there is
irrationally high demand for that assurance.
|11.24.08 @ 12:04PM|#
In fractional reserve banking the purpose of banks is to
create credit. Banks are always and everywhere theoretically
insolvent at ALL TIMES even if they are functionally solvent for
periods of time.
Depends on how you define insolvent. For banks, deposits in the
bank are carried as liabilities (money owed by the bank to
depositors), and loans by the bank are carried as assets (money
owed to the bank by borrowers).
Fractional reserve banking means a bank can loan out more money
than it actually has on deposit, so, from a balance sheet aspect,
the bank will have more assets (loans out) than liabilities (money
on deposit), and wouldn't be insolvent under that definition.
However, from a liquidity standpoint, the bank can't pay off all of
its depositors in current funds/currency/cash, so its technically
illiquid (which is another definition of insolvency - the inability
to pay your debts as they come due).
|11.24.08 @ 12:06PM|#
If you aren't on LIFO for inventory valuation I would
suggest you get on it. And get ready to use NIFO for
pricing.
I've heard of LIFO (Last In First Out) and FIFO (First In First
Out), but not NIFO.
squarooticus|11.24.08 @ 12:08PM|#
I've heard of LIFO (Last In First Out) and FIFO (First In First Out), but not NIFO.
The power of Google commands you:
http://www.answers.com/topic/next-in-first-out-nifo
|11.24.08 @ 12:09PM|#
"Some have asked us to reveal the names of the banks that
are borrowing, how much they are borrowing, what collateral they
are posting," Bernanke said Nov. 18 to the House Financial Services
Committee. "We think that's counterproductive."
I'm from the government and I'm here to help.
I won't cum in your mouth.
The check is in the mail.
|11.24.08 @ 12:12PM|#
RC Dean,
Technically you are right - there is supposed to be a difference
between being illiquid and insolvent. My point is that the only
practical difference between the two terms is fragile depositor
confidence. The asset side is ALWAYS much less liquid than the
liability side, and so any bank can be made illiquid rather easily
and - unless a lender of last resort steps in - insolvent a day
later.
|11.24.08 @ 12:31PM|#
Oh god, we're fucked.
Maybe a zombie plague will make all this horror go away.
Only the Undead can save us now.
|11.24.08 @ 12:38PM|#
Warren-
I'm not sure, anymore, who the junkie is. Is it "the economy" which
needs a pop to get through the day, or is it "the
doctor government" which needs the power rush of being
the salvation of all and sundry?
Fasten your seat belts, and hang on. When this ride finally stops,
it won't be pretty.
Nigel Watt|11.24.08 @ 12:55PM|#
This is just getting hilarious. And you can still find statists all over the country saying "government can save us this time, we promise!"
|11.24.08 @ 12:59PM|#
Won't somebody please think of the children?!?!
I'm thinking of the children who will be hunting us down when they
realize the economic legacy we've left them.
|11.24.08 @ 1:10PM|#
Maybe a zombie plague will make all this horror go
away.
Max Brooks has the answer - World War Z.
I for one welcome the zombie invasion as my preferred apocalypse
scenario. It may just be the world war we're looking for to solve
depression 2.0.
|11.24.08 @ 1:12PM|#
Tbone, my thoughts exactly. Although I'm still very young so I'm
more worried about myself moreso than potential offspring.
Getting rid of every sexual predator, dug dealer, and ne'er-do-well
still won't protect the children from this.
|11.24.08 @ 1:15PM|#
Since we're only loaning the money to the banks, I'm going
to be charging points to those bitches.
Unfortunately, JW, you are not loaning the banks the money. The
Federal Reserve System is not an agency of the Federal Government.
Rather, it is a privately owned cartel of banks, which has been
granted the monopoly power to create our currency, and charge us
interest on the currency so created.
You are not a creditor of the banks and other big companies
borrowing these trillions of dollars, the shareholders of the
Federal Reserve System are the creditors and will reap the profits
as interest.
However, you as a taxpayer are on the hook for the interest
payments, since all money created by the Fed and given to the
Treasury (in exchange for Treasury IOUs to the Fed) is considered a
loan from the privately owned Fed to the US Treasury.
The private owners of the Federal Reserve are charging us all as
taxpayers, interest on the funds used to bail out all of these big
banks and corporations. This is all quite legal, according to the
charter granted by Congress establishing the Federal Reserve
System, back in 1913.
These new debts, $7,400 billion dollars, amount to half of the
gross GDP of the US. In your name, Congress and the Administration
is incurring this debt, which amounts to half of your annual gross
salary. You are responsible for paying back this loan, with
interest, to the privately held Federal Reserve banking
cartel.
The owners of the cartel, are large banking and financial
institutions, such as.....Citigroup, JPMorgan Chase, Goldman Sachs,
and several other large domestic and foreign banks and
financiers.
If you still believe the Federal Reserve system is an agency of the
US government, go study this issue. Find out really how our money
is created, and who has this power, and how they profit.
Paul|11.24.08 @ 1:15PM|#
Oh, by the way, I am locked and loaded with the response to the
next time some egomaniac in a $2,000 suit from one of these
corporations opens his/her mouth:
"Shut the fuck up, you're a civil servant, and I pay your salary
with my taxes."
I can't waaaiiiittt...
|11.24.08 @ 1:19PM|#
"Shut the fuck up, you're a civil servant, and I pay your
salary with my taxes."
That works wonders with the police, doesn't it?
Other Matt|11.24.08 @ 1:24PM|#
I've heard of LIFO (Last In First Out) and FIFO (First In
First Out), but not NIFO.
Think fuel prices, except when they're going down, in which case
it's more like MEIFO (Most Expensive In, First Out).
|11.24.08 @ 1:27PM|#
So, JW, you and me all all the rest of the taxpaying public, are
going to pay for these bailouts two ways:
1) Our income taxes pay for some of the interest and principal on
the trillions of dollars loaned by the Federal Reserve to the US
Treasury.
2) The trillions of new dollars created by the Fed, from thin air,
and injected into the economy, will devalue the dollar, and the
purchasing power of your paycheck and your savings will decrease
accordingly. This is the 'inflation tax', and it hits struggling
savers the hardest, since it increases the cost of essentials like
food and fuel and housing, without any exemption.
The shareholders of the Federal Reserve System banking cartel, are
using thier profits, to buy up large chunks of the US and world
economy, at bargain basement prices, since the markets have
crashed.
After this wealth transfer, from low, middle and upper class people
all over the world, to the owners of the Fed has been completed,
the Fed will allow the economy to recover by providing easy money,
creating another asset bubble. This bubble will grow until it is
time to harvest the crop again in a few decades.
It's the ultimate in 'insider trading', extending over the entire
economy.
I M Ankshus|11.24.08 @ 1:29PM|#
Letter to My Bank
>
>
>
> Dear Sirs,
>
> In view of what seems to be happening internationally
with
> banks at the moment, I was wondering if you could advise
me
> on the following matter:
>
> If one of my checks is returned marked "Insufficient
> Funds," how do I know whether that refers to me or to
> you?
>
> Sincerely,
> I. M. Ankshus
hardcore|11.24.08 @ 1:30PM|#
While we can bitch and moan about this all we want, us
libertarians can see through the smoke and mirrors. We know, to
some degree, how dangerous these policies are.
So how do we profit from this situation, if we can at all?
Certainly, the average american will lose and the average bank exec
will win. Lets see if we can find strategies to more than just
weather the storm, but come out ahead.
Paul|11.24.08 @ 1:32PM|#
That works wonders with the police, doesn't it?
Absolutely. You'd be amazed at how quickly that nets you some free
room and board.
squarooticus|11.24.08 @ 1:36PM|#
So how do we profit from this situation, if we can at all? Certainly, the average american will lose and the average bank exec will win. Lets see if we can find strategies to more than just weather the storm, but come out ahead.
Well, of course any smart person is going to do what they can to
defend and enhance their wealth within the limitations imposed by
reality... but that doesn't mean that I particularly like profiting
off the idiocracy. I would much rather have a free banking system
or a gold standard and not have these opportunities, nor the pain
nor crime that go along with them.
For a real-world example, I don't look forward to the lean years my
parents are going to go through when inflation hits the fan and his
portfolio is still in the shitter in real terms. I've given them
fair warning, but my father would rather lose 40% of his portfolio
in "safe" assets like Ford bonds than move it into "unsafe" assets
like gold. /me slaps head.
|11.24.08 @ 1:37PM|#
So how do we profit from this situation, if we can at
all?
Buy gold and/or silver with whatever savings you have. The US
dollar, and all other major currencies, are going to fall in value
by are large amount in the next few years.
Please read your history books; hyperinflation is a common
phenomenon, just not something that has happend in recent memory to
Americans.
You will soon be paying $25 for a latte at Starbucks, and $50 for a
loaf of bread. At the same time, gold will be priced at thousands
of dollars per ounce.
|11.24.08 @ 1:41PM|#
Malto Dextrin,
After this wealth transfer, from low, middle and upper class
people all over the world, to the owners of the Fed has been
completed...
So could you expound on this claim a little - it's a doozy. How is
the wealth transferred? What form does it take? can you give an
example of a buildup of wealth that was created by the banks
risklessly "printing money"
The Fed is "owned" by member banks - but their ownership consists
entirely of a TINY amount of (nominally) equity shares that never
increase in value, cant be traded, and pay a 6% dividend. The Fed
makes a lot of
money, but this is gievn to the Treasury - this is the
mechanics of the "inflation tax."
I think you must be a "gold bug libertarian" Do you work in the
gold/numismatic industry at all? These charlatans are always
running around like crazy after gold has topped out...
Jordan|11.24.08 @ 1:48PM|#
So how do we profit from this situation, if we can at all? Certainly, the average american will lose and the average bank exec will win. Lets see if we can find strategies to more than just weather the storm, but come out ahead.
I'm investing in copper, lead, and brass...
squarooticus|11.24.08 @ 1:48PM|#
I think you must be a "gold bug libertarian" Do you work in the gold/numismatic industry at all? These charlatans are always running around like crazy after gold has topped out...
Nice ad hominem.
I can't speak for Malto Dextrin, but I am not a gold bug: I didn't
get into gold investing until a few years ago, and I intend to get
out before it becomes a bad investment again. The key is
recognizing that such a day is far off.
It seems more accurate to me to say that you are an
"anti-gold" bug, because you are the one with an irrational
aversion to gold, even when the current market conditions are
precisely those in which gold thrives as an investment.
squarooticus|11.24.08 @ 1:49PM|#
I'm investing in copper, lead, and brass...
QFT, brother! The five precious metals are gold, silver... copper,
lead, and brass. Of course, you need a little steel (and possibly
aluminum) to go along with that, but very little by comparison.
;-)
Jordan|11.24.08 @ 1:57PM|#
QFT, brother! The five precious metals are gold, silver... copper, lead, and brass. Of course, you need a little steel (and possibly aluminum) to go along with that, but very little by comparison. ;-)
On a somewhat related note, I ordered an AR-15 yesterday, which
will not arrive for 4 months (!!). The price seemed reasonable at
the time, but at this rate I'm thinking I'll need a year's salary
to pay for it when it finally does arrive.
|11.24.08 @ 2:02PM|#
Contrary to the old curmudgeon Rothbard, fractional reserve
banking is not fraudulent! It's only a problem when the government
comes in and hampers all of the corrective market mechanisms.
When you deposit money in a bank, and the bank says it will pay you
interest, then there is no fraud because you know it will be lent
out. If the money wasn't being lent out, it would be *you* paying
the bank to warehouse your money. As long as you haven't stipulated
on demand withdrawals, there is no fraud if the bank does not carry
100% reserves. Bank runs are bad, and can certainly cause banks to
collapse, but they are not proof of fraud. If there was a run on
milk at your grocer, so that you could not redeem your milk coupon,
is the grocer being fraudulent? No! If the bank does not collapse,
then you can still get your money out. Just not today. The bank can
borrow from other banks, or it can sell off some assets, or call in
its loans, etc.
I used to be a Rothbardian goldstandardist, until I realized that
what most people mean by "a gold standard" is inherently statist.
The government shouldn't be defining money, they should be getting
out of money completely.
|11.24.08 @ 2:14PM|#
Hi Domo:
The wealth transfer....So could you expound on this claim a
little - it's a doozy. How is the wealth transferred?
It is a doozy. The wealth is transferred by 'front running' the
boom/bust economic cycle. In times of easy money (low interest
rates, and easy to obtain loans) the price of assets (stocks,
bonds, commodities, real estate) increases in nominal terms. Lots
of money put into the economy boosts the price of most everything.
Think of what would happen if, just before an auction, each bidder
entering the room was handed $1,000 in cash.
When money is made harder to get (increase in interest rates, or
stricter requirements to get loans), the rising prices suddenly
quit rising, or even start to fall. Speculators and momentum
traders, especially those that borrowed money to invest near the
top of the market, will have thier loans called in when the markets
drop. Collateral securing those loans will be foreclosed
upon.
If you are astute enough to sense when the money supply is
beginning to tighten, you can sell your appreciated assets for high
prices, and wait for the markets to crash, and then buy back the
same assets for much less at the bottom of the market, just before
the money supply is loosened again.
Since the Federal Reserve is chartered by Congress with the power
of controlling key interest rates and also with setting other loan
parameters (like margin requirements in the stock market), the
people who own the Federal Reserve (indirectly, through ownership
of the banks that make up the cartel) don't have to guess when the
money supply is going to tighten or loosen: They determine when
these events happen, and so can guide the economic cycle to thier
advantage. They don't have to guess when trying to time the market.
This is the ultimate in insider trading, and it is quite
legal.
I think you must be a "gold bug libertarian" Do you work in the
gold/numismatic industry at all? These charlatans are always
running around like crazy after gold has topped out...
Am am now, I guess. But I wasn't until I started looking into the
history of money and banking in the US and in other societies,
about a year ago as our economy started to get weird.
There are charlatans in any field, especially when the blowoff
phase is reached. I am sure this is evident now in the tech and
real estate bubbles, and will be in the coming commodities bubble.
But I don't think we are near that phase yet; the value of the
dollar has not yet adjusted in response to the huge increase in the
quantity of money.
If you don't know how our money is created, and don't understand
the basics of our banking system, and its history, you are not well
positioned to make good economic decisions. It's that simple.
Make it your job learn about these things. You may be amazed and
intrigued by how the system really works.
|11.24.08 @ 2:14PM|#
Nice ad hominem.
Only conditionally. I have a strong dislike for people who profit
by manipulating other peoples fear for profit. If the guy comes
back and says he doesn't sell gold or collectable coins for a
living, I will happily say I don't think he is a charlatan.
you are an "anti-gold" bug, because you are the one with an
irrational aversion to gold
I am indeed "anti-gold" for monetary purposes, and I have offerred
many critiques of this uniquely libertarian fallacy on these
boards. My aversion to gold-as-money is anything but irrational, as
I formerly advocated a gold standard, but after years of studying
inflation, monetary policy, and fixed income markets I have
concluded that it is as arbitrary as fiat currency, and has many
innate disadvantages, as have been well documented by Milton
Friedman.
It's true that Gold has increased in value, but having observed
these cycles before I know what goes on. Whenever there is a panic,
the gold speculators run up gold and then sell to retail once the
dumb public gets involved. They always take huge fees, and spreads,
and invariable use fear to sell their wares. It is, for all
intents, a "bubble" in security. I find it extremely unlikely that
gold will continue to rise in a deflationary environment when every
other commodity on the planet is getting chucked out like week old
fish.
|11.24.08 @ 2:19PM|#
Please read your history books; hyperinflation is a common phenomenon, just not something that has happend in recent memory to Americans.
Not just in recent memory, hyperinflation has
never happened to Americans. We have had
bouts of severe inflation before, but never ever
hyperinflation.
I don't think we will ever see hyperfinflation here. It happened in
Germany but no one (except a couple of cranks in Austra) knew what
caused it. Even if some still don't know what causes it, enough
people now know that there would be massive demonstrations to stop
it (not just mere sign waving on street corners in by Paulites).
It's happening right now in Zimbabwe, but that's because there's a
dictator in charge with a death penalty for not using the currency.
Neither of those two factors are in play here.
There are more productive strategies we can use to combat Fed and
Treasury stupidity than using silly scaremongering about
hyperinflation.
|11.24.08 @ 2:19PM|#
Domo:
I am in no way in the business of selling gold or collectible coins
either for a living or as a hobby.
|11.24.08 @ 2:19PM|#
the people who own the Federal Reserve (indirectly, through
ownership of the banks that make up the cartel) don't have to guess
when the money supply is going to tighten or loosen: They determine
when these events happen, and so can guide the economic cycle to
thier advantage. They don't have to guess when trying to time the
market. This is the ultimate in insider trading, and it is quite
legal.
One example, please.
Am am now, I guess.
So you are a gold bug, or you do sell gold/numismatic items?
Make it your job learn about these things. You may be amazed
and intrigued by how the system really works.
Yup - I do it for a living. You've cracked the first layer - but
the rest will take a bit longer than a year. There is truth and
fallacy in every economic viewpoint - including the beloved
Austrian school.
|11.24.08 @ 2:21PM|#
I am in no way in the business of selling gold or
collectible coins either for a living or as a hobby.
Then I absolve you of being a charlatan - instead you are merely
wrong. ;-)
|11.24.08 @ 2:27PM|#
Not just in recent memory, hyperinflation has never happened
to Americans. We have had bouts of severe inflation before, but
never ever hyperinflation.
Hyperinflation occurred in the US during the time of the
revolutionary war. The continental congress needed to fund the war,
but did not have enough money going in to the conflict, so it
authorized the printing of "Continental dollars". Over the course
of a few years, hundreds of millions of paper dollars were printed,
to the point where they literally became worthless. This is the
origin of the phrase "Not worth a Continental."
The framers of the constitution, remembering this, prohibited paper
money and required that only gold and silver be used as legal
tender, by inserting these principles in the Constitution. These
are historical facts, albeit obscure facts. Who actually reads the
constitution nowadays, or for that matter, studies history?
|11.24.08 @ 2:31PM|#
Then I absolve you of being a charlatan - instead you are
merely wrong. ;-)
Care to wager on that?
I'll sell to you one ounce of gold, for 800 US dollars, three years
from now.
I also hope I'm wrong. :-)
|11.24.08 @ 2:42PM|#
Care to wager on that?
I'll sell to you one ounce of gold, for 800 US dollars, three years
from now...reversed...
gold 3 years forward is trading 870 - so If I wanted to speculate,
I'd be able to get a better bid in the market. Why not offer $1000
if you are so confident?
|11.24.08 @ 2:47PM|#
Dude, just outright nationalize the motherfuckers already. It can't possibly be any worse than this.
|11.24.08 @ 2:51PM|#
The framers of the constitution, remembering this,
prohibited paper money and required that only gold and silver be
used as legal tender, by inserting these principles in the
Constitution. These are historical facts, albeit obscure facts. Who
actually reads the constitution nowadays, or for that matter,
studies history?
While we are studying, lets remember that the austrian school's
hated Fed (DOOOOOOM) was created to prevent currency debasement by
the congress as well. The Congress essentially abrogated their
authority to prevent themselves and their sucessors from getting
crazy with the Cheeze Whiz.
SIV|11.24.08 @ 2:52PM|#
Gold going up?
I must have missed the uptick in jewelry and industrial metal
demand.
|11.24.08 @ 3:03PM|#
I used to be a Rothbardian goldstandardist, until I realized
that what most people mean by "a gold standard" is inherently
statist. The government shouldn't be defining money, they should be
getting out of money completely.
I went this path as well, and then I researched the wildcat era.
Competing money isn't necessarily great either, since it introduces
significant complexity and non-transparency into thye economy. It
also raises enormous taxation and accounting problems. In the end,
I concluded that fiat currency is a terrible solution, only that
it's better than all the other alternatives.
|11.24.08 @ 3:04PM|#
The Congress essentially abrogated their authority to
prevent themselves and their sucessors from getting crazy with the
Cheeze Whiz.
Well, they certainly seem to have reclaimed this authority.
|11.24.08 @ 3:07PM|#
Well, they certainly seem to have reclaimed this
authority.
They got crazy with the summer sausage (spending/debt/pork/bull
market in stupidity) - the cheeze whiz (monetarization of the
deficit) is still off limits as of 3:10 today.
Naga Sadow|11.24.08 @ 3:10PM|#
Hmmmm . . . with the inflation sure to come I may have to keep bartending for years! Crap!
SIV|11.24.08 @ 3:14PM|#
Naga,
Japan has been waiting for inflation to save them since
1990.Deflation should be bad for the Mississippi casino business
though.
squarooticus|11.24.08 @ 3:24PM|#
I have concluded that it is as arbitrary as fiat currency, and has many innate disadvantages, as have been well documented by Milton Friedman.
I certainly can buy the argument that a gold standard is
undesirable, leaving aside the comparison with fiat legal tender
for a moment. But please explain to me how free market money is
bad. I'd argue that fiat currency is especially bad as it relates
to taxation, because income and capital gains taxes don't generally
allow you to correct for price inflation in the cost basis (though
I'm sure lots of people have gotten away with it over the
years!)
From my recollection, I don't believe Rothbard actually advocated a
gold standard as such because, while it has some advantages, it has
the big drawback of encouraging the government to manipulate the
gold market.
|11.24.08 @ 3:26PM|#
After months of trying to research and make sense of this all I
could gather was that the money system is horrendously complex and
nearly impossible to figure out. What I have gathered so far is
that the Fed prints money and lends it to the Treasury, at
interest, and then that is distributed into the economy, causing
inflation. The Fed charges interest on this created money. Where
does this interest come from, where does it go if the Fed doesn't
keep it, and if they do keep it, who specifically is getting
it?
Domo, could you explain more fully your first comment at 11:37?
Naga Sadow|11.24.08 @ 3:27PM|#
SIV,
Please refer to Great Depression. I'm hoping an influx of gangsters
with a taste for gambling and whoring will keep my casino
afloat.
Seriously, I'm told my casino is up for sale right now thanks to
Vegas fucking up. On another note, my take has gone from 3k a month
to roughly 3200 dollars a month. Apparently people like to gamble,
drink, and eat at restaurants still. No complaints so far but I got
my fingers crossed it stays that way.
|11.24.08 @ 3:49PM|#
Robbie,
I said: The aggregate balance sheet destruction caused by the
crisis (which is really just massive credit deleveraging) can be
entirely soaked up by the government using the Feds balance sheet.
Is this a terrible situation? Yes. Is it better than letting 60-80
of banks and maybe 20-50% of companies go bust? Probably - yes. At
least in the short term (2-10 years).
When a bank goes under like LEH brothers, the assets and
liabilities don't just go away. Either the bank gets sold, or
broken up and the parts get sold. Someone has to buy them, by
issueing stock or debt or something - some other company expands
their balance sheet to accomodate those assets. What's more, when
credit markets become risk averse, banks lend less than they would
otherwise - this means that they leave money on deposit at the Fed
in excess of what they have to by regulation (the reserve fraction)
They are purposely carrying a smaller balance sheet than they
could. If the reserve ratio is 10%, every excess dollar left at the
Fed indicates the destruction of $9 of credit in the economy,
because the bank could lend that much if they wanted to.
This deleveraging effect snowballs, since unwillingness to take
risks results in risky asset price depreciation (housing) which
further prompts banks to declilne to lend.
The Fed's role is to try and stop this. It becomes a lender of last
resort. It's is like a mother bank that has spawned all the others.
Unlike them, it has no reserve fraction, and can in an emergency
expand it's balance sheet infinitely by trading currency (which is
debt for the central bank) for assets. During normal times, this is
treasury debt - it does this for no real reason other than to
control the monetary supply - it's not for profit. When things get
bad, it buys worse assets, to expand it's balance sheet to fill the
gap created by risk averse banks. It's the modern way to stop a
bank run. And yes, the money can be destroyed as easily as it gets
created.
|11.24.08 @ 3:55PM|#
But please explain to me how free market money is
bad.
It's not terrible - it's just not as good as fiat in my opinion.
Wildcatting introduces transactional difficulties, and a whole
industry of middlemen. It also makes certain types of fraud likely
(and a host of inevitable regulation and expensive enforcement to
go with it). It's a weak second choice for me.
|11.24.08 @ 4:02PM|#
Hyperinflation occurred in the US during the time of the revolutionary war. The continental congress needed to fund the war, but did not have enough money going in to the conflict, so it authorized the printing of "Continental dollars". Over the course of a few years, hundreds of millions of paper dollars were printed, to the point where they literally became worthless.
You've got a possible contender there. But I don't call it
hyperinflation because there were competing currencies people could
use. Colonial bills, foreign notes, silver, etc. So while the value
of the Congressional Continental plummeted in value, you didn't see
people using wheelbarrows full of money just to buy their
dinner.
I went this path as well, and then I researched the wildcat era.
Look outside the U.S. The problem with looking at money from the
American perspective is that we were so oddball historically.
States each had their own banking rules. The landscape was a
hodgepodge of conflicting regulations. Pointing to this era as an
indictment of free banking is erroneous, as is pointing to it as an
example of a gold standard. For a better example, look at
Scotland.
Competing money isn't necessarily great either, since it introduces significant complexity and non-transparency into thye economy. It also raises enormous taxation and accounting problems. In the end, I concluded that fiat currency is a terrible solution, only that it's better than all the other alternatives.
The problems you cite were largely solved by the free market. Not
so much in the US (because of our monetary weirdness), but
elsewhere when there was free banking. Banks will converse on
common units of account and clearinghouses will deal with much of
the accounting. See Larry White for some
discussion of this.
|11.24.08 @ 4:10PM|#
Domo, how does the buying of these risky assets stop a bank run? It seems that it doesnt really matter how much money there is in the system as long as the value of the money stays relatively stable. The ability for money to change hands seems far more important, and in that sense I can understand why it would be better for the Fed to step in and keep banks lending. What discipline would one learn about this stuff under, econ or accounting or what?
|11.24.08 @ 4:30PM|#
how does the buying of these risky assets stop a bank
run?
In a bank run, once it has exhausted it's reserves, the bank has to
sell its assets to get cash to pay depositors. Individual
depositors fear that there wont be enough for them - that only the
first people will get their dough. When the lender of last resort
says "I'll lend the bank as much money as they need with their
risky assets as collateral" it takes away the incentive to run the
bank, because everyone feels they could get their money if
they needed to. BTW in my usage, buying assets is ~= lending cash
against them as collateral because it amounts to the same
thing.
The amount of money matters a lot - up to a certain point. When the
Fed injects money into a normal banking system by lowering the
rate, it expands the amount of credit in the economy. When banks
refuse to lend even when the interest rate is 0, injecting more
money has no effect - it just sits on deposit at the Fed and
doesn't make it from the banking system to the real economy in the
form of loans. You can't make the rate less than 0% - people would
just hold paper bills or checks.
Econ, finance, and monetary policy. I was lucky to have a fantastic
prof at NYU who specialized in monetary policy, plus work with some
amazing economists at various places over the years.
|11.24.08 @ 4:37PM|#
Brandybuck,
I'm sure many problems could be solved by free market. One of the
issues of free banking that I can think of off the top is the
control of monetary policy. It seems that the system would be
inherently pro-cyclical and exacerbate boom and bust cycles. A
brief search seems to confirm that this has indeed been the case in
many times/places that it has been tried. Even if the Fed gets it
wrong sometimes, It's has generally managed to be
counter-cyclical.
|11.24.08 @ 4:40PM|#
And let me be clear - I'm no fan of legal tender laws. I would welcome the availability of alternative currencies, even though I think they are probably useless, and that people would probably lose a bunch of money. I probably wouldn't use them though, and would not support abolishing the Fed.
Paul|11.24.08 @ 4:56PM|#
about a year ago as our economy started to get
weird.
FWIW, our economy never got weird, in my opinion. Our economy is
acting exactly as one would expect... that is, once one knows the
information that no one knew, or cared to know five (or so) years
ago.
When you have financial institutions leveraging themselves out the
wazoo with questionable debt instruments, there's a crash somewhere
in the future.... as soon as that information becomes known.
The only thing weird about the economy was that it was working the
way it did with so few people caring. But like all schemes, the
first person to call in a debt starts the cards-a-tumblin'.
|11.24.08 @ 5:16PM|#
And let me be clear - I'm no fan of legal tender laws. I
would welcome the availability of alternative currencies, even
though I think they are probably useless, and that people would
probably lose a bunch of money. I probably wouldn't use them
though, and would not support abolishing the Fed.
Repealing the legal tender laws, would in effect abolish the Fed.
Existence of alternative forms of money would allow individuals to
opt out of paying interest to the Fed by opting to not use its
Federal Reserve Notes, every one of which is an interest bearing
IOU from the US Treasury, the interst payments being secured
through direct taxation of the citizenry. In other words, your
labor, is collateral for the owners of the Fed.
Whether you support fiat currency or not, there really is no good
reason why the Treasury could not create fiat currency on its own,
instead of subcontracting out this function to a private monopoly
consortium. Why did the Congress give the exclusive money-making
printing press to the Fed, which charges the government interest on
the money it creates, instead of instructing the Treasury to print
up the fiat currency itself, interest free?
Suppose you had the exclusive legal right to counterfeit money.
Would you give this right over to someone else, and then also pay
that other person for acquiring that right? What a Tom Sawyer
whitewash scheme!
And, yes, the ostensible reason for creating the Federal Reserve
System, was to provide stability in the value of the dollar. How
has that worked out? Today's dollar buys what about 4 cents would
buy, a century ago... a 96% loss in value.
|11.24.08 @ 6:08PM|#
This is tantamount to the repeal of the 13th Amendment. We are now all slaves! Ayn Rand was right on this one.
|11.24.08 @ 6:44PM|#
One of the issues of free banking that I can think of off the top is the control of monetary policy. It seems that the system would be inherently pro-cyclical and exacerbate boom and bust cycles.
There would be no "policy" under free banking, as markets don't
have policies. They're just markets.
There would be some cyclical tendencies with free banking, simply
because there will still be fractional reserves and thus inflation.
But it will be market demand for credit that will drive the
inflation, not governmental policy that everyone should own a home
or to finance major wars without raising taxes. The other banks in
the system will act as checks against those banks who inflate too
much. Thus, the boom/busts of free banking will not be as severe as
those under a centrally controlled monetary system.
A centrally mandated 100% reserve hard money system would prevent
inflation and thus the business cycle, but it requires a government
to enforce, and they're the last ones I could ever imagine having
the disciple not to muck about with policy.
|11.24.08 @ 6:46PM|#
Why did the Congress give the exclusive money-making printing press to the Fed, which charges the government interest on the money it creates, instead of instructing the Treasury to print up the fiat currency itself, interest free?
Because the Fed was supposed to be more than just a printing house.
It was supposed to be a central bank performing central bank
functions. Being a central bank is one thing the congress or the
Treasury cannot do. That we could get along just fine without a
central bank (or a central printing press) is another issue.
p.s. My chief problem with the Federal Reserve is NOT that it is
private, but that it's central bank. Too many Paulites bring this
up as a complaint. A central bank monopoly is wrong regardless if
it's a public, quasi-private or private central bank.
|11.24.08 @ 10:08PM|#
Yes. If the Fed was not a government enforced monopoly cartel
(via the legal tender laws), it would have to compete with other
issuers of currency.
Think of it: Every dollar in your pocket was created out of nothing
by the Fed and issued to the Treasury in exchange for interest
bearing bonds, payable by the Treasury in those same dollars. The
government must tax you to get the money to pay the interest on
those bonds, which means that YOU must earn the money to pay the
taxes that the Treasury then remits to the Fed as the interest
payments on the bonds. A fraction of every dollar you earn is
skimmed off by the owners of the Fed and spent as they please,
without public accounting of any kind.
YOU are paying this interest on every dollar you earn, until you
get rid of it by spending it. The more dollars you earn, the more
interest the Fed gets. The dollars in your pocket are units of
DEBT, not units of value. The fraction of your taxes that are paid
to the Fed as interest, are NOT used to support government
services, of whatever kind. These funds go directly to the
shareholders of the "Federal" "Reserve" System.
How much of the US GDP do the owners of the Fed skim off every
year? Well, what is the interest rate on the Treasury bonds issued
to the Fed, and what is the total principal of those bonds?
|11.24.08 @ 10:23PM|#
Repealing the legal tender laws, would in effect abolish the
Fed.
Nope. In fact it would probably do nothing. The govt would not be
obligated to take taxes in any coin but it's own, so you would
still need to use them.
In other words, your labor, is collateral for the owners of the
Fed.
Alternate currencies would be no better, except through an
intermediate step, unless taxation were completely abolished. This
is a blind alley.
there really is no good reason why the Treasury could not
create fiat currency on its own, instead of subcontracting out this
function to a private monopoly consortium.
Yes there is - to remove the tendency to inflate before
elections.
A fraction of every dollar you earn is skimmed off by the
owners of the Fed and spent as they please, without public
accounting of any kind.
No - it is not... The fed is self funded, but this is a very small
amount - a few thousand salaries, maintanence, etc. As I explained
before, any excess over operating costs is returned to the treasury
except for the 6% on the equity shares (which is tiny).
|11.24.08 @ 10:39PM|#
No - it is not... The fed is self funded, but this is a very
small amount - a few thousand salaries, maintanence, etc. As I
explained before, any excess over operating costs is returned to
the treasury except for the 6% on the equity shares (which is
tiny).
Are the books of the Fed open to public scrutiny, to verify where
the money goes? Are these books audited by an independent
party?
Alternate currencies would be no better, except through an
intermediate step, unless taxation were completely abolished. This
is a blind alley.
Taxation need not be abolished, just taxation payable only in
Federal Reserve Notes. And even if taxes were still to be paid only
in such notes, demand for them would be much less, since most
transactions would take place in competing currencies.
Yes there is - to remove the tendency to inflate before
elections.
Congressional elections are every two years. We have had plenty of
inflation over the decades, irrespective of the election cycle, and
under the current currency regime. We have also had one depression
and several recessions, and are working on another. Clearly, if the
reason for creating the present system was to establish stable
currency and stop the business cycle, it has not worked.
|11.25.08 @ 1:36AM|#
Every dollar in your pocket was created out of nothing by the Fed
Actually, those pieces of paper were created by the Treasury. You
can take a tour and actually see those little pieces of paper being
printed. Cash constitutes such a small percentage of the money
supply that the Fed doesn't bother printing it. They have far more
efficient ways of inflating.
|11.25.08 @ 2:58AM|#
Yes, I know, Brandybuck. But it's hard to visualize a
nonmaterial entity like a unit of currency, without seeing in your
mind's eye a dollar bill. "They have far more efficient ways of
inflating." Unfortunately true.
The headlines today scream that the Fed has committed to a new,
$7.4 trillion-with-a-T bailout package. According to the St. Louis
Fed, the current monetary base is $1.5 trillion, up from a longtime
level of $0.85 trillion last September. If this new $7.4T bailout
adds to the monetary base, it will bring it to a new level of $8.9
trillion, a 10-fold increase in the money supply. As this new money
works its way from banks into the general economy, we should see a
proportional increase in prices.
|11.25.08 @ 8:00AM|#
Are the books of the Fed open to public scrutiny, to verify
where the money goes? Are these books audited by an independent
party?
the fed publishes a variety of statistics which would answer your
questions if you knew how to read them.
Taxation need not be abolished, just taxation payable only in
Federal Reserve Notes.
This goes much further than repealing legal tender laws. Why should
the government accept other forms of payment, even if other types
of moeny are legal. A treasury note is a claim on future tax
revenue, so why should the treasury accept Bob Dollars?
Clearly, if the reason for creating the present system was to
establish stable currency and stop the business cycle, it has not
worked.
Actually recessions have been far fewer, shorter, and shallower
since the Fed was created.
In the end, this empirical argument is probably the best one for
the Fed. It is inherently unsatisfying to people like you and I,
who want to understand why. I have taken the approach of accepting
the empirical evidence, and trying to learn why theory should
produce what we see in practice.
|11.25.08 @ 8:05AM|#
And yes, the fed gets audited regularly by both the GAO, and private accounting firms.
|11.25.08 @ 1:33PM|#
Actually recessions have been far fewer, shorter, and
shallower since the Fed was created. In the end, this empirical
argument is probably the best one for the Fed. It is inherently
unsatisfying to people like you and I, who want to understand why.
I have taken the approach of accepting the empirical evidence, and
trying to learn why theory should produce what we see in
practice.
I'm not convinced that, since 1914, recessions have been fewer,
shorter and shallower, when compared to the previous 120 years.
Prices were certainly much more stable in the pre-Fed period, and I
don't think there was anything like the Great Depression between
1789 and 1914.
And if the adoption of the present system has truly reduced the
number and severity of recessions (forgetting about the
Depression), it may be that we have merely traded many moderate
recessions, for fewer really catastrophic financial crises
happening less often.
The US GDP is about $14T. The Fed is going to raise the monetary
base from $0.85T to $8.9T over about 6 months, starting last
September. It seems to me, that what is going on is the reduction
of debt by massive devaluing of the dollar. Apart from issues of
economic justice (stealing value from creditors), is the issue of
practicality: Can this be pulled off without crashing the economic
system? Will the present bondholders sit still while the value of
their investment is cut tenfold, or will they dump their bonds and
by doing so disrupt trade and commerce? Will savers (those chumps!)
get mad enough to ignite civil unrest? Who will take care of the
people who trusted the government to make good on its long term
commitments, like Social Security?
Tell me where I'm wrong here. How can the creation of all this new
money, not have these effects, good (retiring our massive debt) and
bad (committing massive fraud against bondholders and others who
were promised value from the government in the future)?
|11.25.08 @ 6:23PM|#
Malto, the reason I don't think putting that much money into the system won't have such inflationary effects is that I don't think it is truly entering the system. Unless I'm wrong, the majority of that is loans to banks which, when paid back, destroys the loaned money and removes it from the system.
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