This plot is getting thrown around quite a bit on the gold-bug and Austrian econ forums:
(http://research.stlouisfed.org/fred2/data/BASE_Max_630_378.png)
This plot is published by the Fed itself. What it shows is the sum of all currency that is either in wallets or in commercial banks.
Now the longer I look at this plot, the more I feel the urge to take every last cent I have and buy silver and gold. But then, I am a simpleton when it comes to the machinations of the Fed and macro-economics.
So my question is this: given this data, which indicates to me that they are printing money like crazy, how can we not get hyperinflation as the result?
Imagine that a large sum of money was moved from equities to commercial banks... and from investment banks to commercial banks. The graph would have that as a result.
Quote from: John Edward Mercier on January 15, 2009, 09:23 AM NHFT
Imagine that a large sum of money was moved from equities to commercial banks... and from investment banks to commercial banks. The graph would have that as a result.
That seems plausible. So do you think this spike is caused by those failing investment banks being morphed into "bank-holding companies", so that this is not actually new money but just reclassified money?
Is there any way to break down that spike according to amount that is new and amount that is reclassified?
You'd have to go into the actual balance sheet.
Another item you can look to is the DX Index. Its doesn't show actual quantitative expansion (which comes on fairly quickly when the FedRes does it), but gives a relative strength of the USD.
The economy is currently hyperinflated and will become more so. You're not yet seeing the results because banks are hoarding the cash, not making loans etc. It should begin to become apparent by mid 09 when the bama money really hits the streets in earnest.
Oil is currently selling below the cost of production. Think about it. Gold, silver and wheat along with oil should be through the roof by this time next year.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3526645/Citigroup-says-gold-could-rise-above-2000-next-year-as-world-unravels.html
I betting more toward a second tier credit deflation.
There is an awful lot of unsecured personal debt in credit cards and a lot of announcements of lay-offs that have the 90 day federal notice period.
I'm thinking we, and the banks, are getting a short reprieve before the bottom really falls out.
I agree, Jon. I think we should expect a pretty serious deflationary cycle before the inflation sets in. There are so many things causing a collapse of the money supply right now. Also, as businesses go out of business, they'll have a lot of stock to sell off like Circuit City. We touched on this briefly on FTL last night. BTW, did everyone listen when I co-hosted last night? 8)
Buy stuff now or soon!
I think it will be summer before we see any hyper-inflation...unless the Messiah addresses it, which is not likely. Natural resources that are based on our need for warmth will continue to rise because of the season, but I'm thinking it'll be Spring when we start seeing food prices go up.
I'm not sure the exact numbers, but the FED was pumping in 2-5 billion dollars per day every day for almost two weeks before the "Bailout Bill"(sorry, Rescue Plan) failed in October for the first time. That money was likely going to repay/repurchase/buyout certificate holders of asset backed securities that realized they were defrauded when they invested in Special Purpose Vehicles backed by mortgage loans.
The SPV's were set up as ponzi-schemes, the foreign investors found out, the Government paid for their silence. http://money.cnn.com/video/#/video/news/2008/07/31/news.073108.tavoli.cnnmoney. Notice how the Madoff thing is the "biggest ponzi-scheme" in history? It's a distraction story.
Between the "Rescue Plan" and Obama's plan to fix things, we're close to $2 trillion in new money being created. That doesn't include the mysterious $10-$25 trillion the FED loaned out before any laws were passed or the FDIC's plan to insure this new "money" is taken into account.
The real problem, to me, is the derivatives market. It's one thing to sell our debt...that's capitalism. It's another to base our capitalism off of a gamble. The U.S. government has lost its AAA credit rating. Nobody's buying our debt except for private American Banks and they're buying from the FED. I have a feeling this will be reported in the Mainstream Media around the time the bond market begins to crash.
In the past 10 years, through derivatives, we have leveraged our assets by at least $2.8 quadrillion...not a typo. I'm no economist, but to me the derivative market is almost the same as fractional-reserve banking.
Is hyper-inflation coming? Yes. When? I'm not quite sure, but I'd say you'll begin noticing price increases in utilities and food around March and April.
Retail goods won't begin spiking until there is a noticeable increase in commercial foreclosures which is starting to take place, but not yet being reported as big of problem as it will turn out to be.
After commercial foreclosures will probably come huge waves of credit card defaults. Don't worry about the credit card companies, they'll get their TARP funds:)
Then I think you'll hear stories about how "student loans backed by the government" are starting to default resulting in....you guessed it, less money for college tuition. I can't wait to see the Obama supporters get pissed about this, but it probably won't be reported in the Mainstream Media until the holidays next year, before the spring college semesters begin in 2010.
http://www.liveontenthousand.com/
Quote from: John Edward Mercier on January 16, 2009, 11:59 PM NHFT
I betting more toward a second tier credit deflation.
There is an awful lot of unsecured personal debt in credit cards and a lot of announcements of lay-offs that have the 90 day federal notice period.
I'm thinking we, and the banks, are getting a short reprieve before the bottom really falls out.
I agree though I think it will be very short. Looking for it to start next week, market rebound possibly surpassing 10k by the end of summer then down from there. Maybe 600 gold, oil is already bottomed out. I've heard some people talking 25 but don't believe it. It would be tough for it to get much below 35.
Quote from: John Edward Mercier on January 16, 2009, 11:59 PM NHFT
I betting more toward a second tier credit deflation.
There is an awful lot of unsecured personal debt in credit cards and a lot of announcements of lay-offs that have the 90 day federal notice period.
I'm thinking we, and the banks, are getting a short reprieve before the bottom really falls out.
Keep in mind also that any FannyMae, FreddieMac, GinnieMae loans are being forced into "re-modification". This will delay the true foreclosure numbers for three to six months.
I think more credit card companies will be asking for TARP funds soon (or TARP 2), but watch for the commercial mortgage defaults.
It won't mean as much to homeowners but will likely drag stock prices lower. Commercial mortgage defaults will be the MSM story to cover up credit card defaults and student loan defaults.
I know it's not a hot topic of conversation around here but credit card defaults fall under the same fraudulent acts that mortgages do. If you found out that the person that invested in your debt was paid in full TWICE would you still want to pay the debt?
Not sure I understand that.
But what I am talking about is reduced consumption due to lower/lack of income and tighter credit.
When the average person first gets laid off... they begin using their revolving credit to keep the same, or nearly the same, consumption pattern. Once the credit begins to max, they cut dramatically and go for asset liquidation.
http://blogmaverick.com/2009/02/20/a-little-video-comedy/
p.r.i.n.t. money
It was my understanding that large banks are at, or above, 100% reserve ratios. Austrian's have been cheering for that since it's inception... but not like this.
The Fed. Reserve is currently paying out 1% or something for money the banks give it 'in reserve'. See above. This is where all the money is right now. That they aren't lending it out, aka "credit crises", is what is terrifying.
You see, they aren't making money on a 1% payout when they are simultaneously paying 2-5% to checking and savings account holders. ( It's so twisted... it's the same money. Grrrr. )
So what Congress and business is screaming for: Save The Credit Crisis!, will be devastating to the dollar right now. If they actually lend out that money the fractional reserve process will cause the explosion of dollars we fear. Some as yet unheard of accounting trick of biblical proportions will be needed to avoid it. Like the Fed agreeing with Ron in a house finance session and abolishing itself on the spot.
How can the bubble of money, now in reserve at the Fed, be moved back into the markets/equity/business without the intervening banks charging lending fees for it? They don't give out money, they lend money. Except now, they aren't, and if they do: Boom.
I'm honestly looking for a discussion. Is anything I presented here wrong?
they can and have charged very little interest
Dan is right, the banks are losing money on every excess dollar held at the Fed. When they lend, the inflation (money creation) will flow across the world economy. If some fail, some (Citi, BoA) will be judged "too big to fail" and face even more pressure to release the next bubble.
QuoteIf they actually lend out that money the fractional reserve process will cause the explosion of dollars we fear. Some as yet unheard of accounting trick of biblical proportions will be needed to avoid it. Like the Fed agreeing with Ron in a house finance session and abolishing itself on the spot.
Yep. And the Fed isn't going to abolish itself, so inflation it is.
Don't be holding dollar-denominated bonds when it hits.
Quote from: Dan on March 09, 2009, 02:42 PM NHFT
It was my understanding that large banks are at, or above, 100% reserve ratios. Austrian's have been cheering for that since it's inception... but not like this.
The Fed. Reserve is currently paying out 1% or something for money the banks give it 'in reserve'. See above. This is where all the money is right now. That they aren't lending it out, aka "credit crises", is what is terrifying.
You see, they aren't making money on a 1% payout when they are simultaneously paying 2-5% to checking and savings account holders. ( It's so twisted... it's the same money. Grrrr. )
So what Congress and business is screaming for: Save The Credit Crisis!, will be devastating to the dollar right now. If they actually lend out that money the fractional reserve process will cause the explosion of dollars we fear. Some as yet unheard of accounting trick of biblical proportions will be needed to avoid it. Like the Fed agreeing with Ron in a house finance session and abolishing itself on the spot.
How can the bubble of money, now in reserve at the Fed, be moved back into the markets/equity/business without the intervening banks charging lending fees for it? They don't give out money, they lend money. Except now, they aren't, and if they do: Boom.
I'm honestly looking for a discussion. Is anything I presented here wrong?
All solvent banks are at 100% reserve... not sure what you mean by ratio.
The Federal Reserve Banks pay dividends to the member banks based on earnings... not a specific percent.
Not sure where you are getting 2-5% on checking and savings, but this is earned through making loans (usually short term). The amount a bank places in 'reserve' is currently 10% of demand deposits (checking/etc), limiting it fractional reserve banking to a multiple of ten (investment banks outside the FRS had gotten as high as 24).
The problem with the system is not that the banks are not loaning money... nor should they have reserves lowered to the point that have 4% equity as collateral... its that the investment banks and finance companies that were outside the FRS either no longer exist or are in such bad shape they can not lend.
While those commercial banks are only 'losing' money to the write-down of loans on book.
The lowering of the 'reserve' limit would compound fractional reserve banking and most likely lead to the Panics of the late 1800s and early 1900s.
I know everyone talks about how they want money backed by gold, but here's a question.
Isn't the amount of value in the world changing on a regular basis?
A loan in a good economy is considered on a balance sheet as money in the bank.
One month later it is not worth the same, because the government steps in and forces banks to report all mortgages as if they were foreclosed on based on the current value of the property. Some of these people will still pay off the mortgage.
When something goes down in value there is not a decrease in monetary supply, so when someone sells at a loss that person has lost net worth. Yet no dollars were destroyed so more dollars seeking less value equals inflation even without government involvement and with a gold backed currency.
The opposite should also occur naturally. There is a creation of value in the world due to production and scarcity causing deflation.
This was an issue faced by Benjamin Franklin. He chose to inflate the currency, to meet war needs. (his auto biography he issued colonial bonds and paid in funny paper money) A penny saved is a penny earned indeed. The real problem with deflation is if some one or some group hoards dollars or gold, then it becomes less available and move valuable as a medium of exchange, but ceases to be a decent currency. It's the flow of currency and exchange of goods that gives currency it's value. There must be enough currency in circulation despite quantity of goods to maintain trade of goods and services.
If we would limit the possession of our currency to within our borders we would not have to inflate our money, because it would not go over seas. They would have to purchase some security, product or service in exchange for what we import. This would allow for a fluid currency and remove a need to print more money because of hoarding.
It does no good to buy gold in a failing economy as after an economy has failed no one will put a value on gold if they are not meeting their daily needs.
I bet if I went out with a troy ounce of gold, I would be hard pressed to be able to buy a meal in a restaurant with it, because the people would have no idea how much I was be over paying for that meal on an oz gold for a meal for 2 exchange basis. ($910 per troy oz today)
Do you really want to go back to the old dollar to gold ratio?
Do you really want to exchange all your current money and get fewer dollars back? How about take a cut in pay at your job to be paid in stable dollars. I know quite a few people unwilling to take a pay cut.
Do you want all your loans you agreed to pay which were received in worthless dollars. To have to be paid back in gold backed dollars of the same amount. Just like is it fair that you pay the banks back with inflated dollars for mortgages or credit cars.
Repairing our monetary system is more complex than most people give it credit. You can't just close the Federal reserve and have everything be ok.
Quote from: John Edward Mercier on March 11, 2009, 09:03 AM NHFT
The amount a bank places in 'reserve' is currently 10% of demand deposits (checking/etc), limiting it fractional reserve banking to a multiple of ten (investment banks outside the FRS had gotten as high as 24).
Yes, this is what I was taught to me in Macro Economics. What I'm saying has changed since Nov '07 is that they (the member banks) have creeped up and over 100% reserves. They aren't lending, to each other or to patrons, willing to suffer a measly 1% guaranteed return from the Fed than lend it to the next failing industry/investment firm.
If they are forced/coerced into lending, by the Fed reversing the 1% payout to a 5% charge for one example, or simply legislative fiat, then there is likely going to be a fractional reserve explosion. IIRC, that would mean a 9 fold increase in the monetary base in very short order.
We wouldn't need to close the Fed if we were "allowed" competing currencies. The problem would take care of itself as the market moved to more reliable ways of storing and trading value.
Quote from: Dan on March 11, 2009, 10:06 PM NHFT
Quote from: John Edward Mercier on March 11, 2009, 09:03 AM NHFT
The amount a bank places in 'reserve' is currently 10% of demand deposits (checking/etc), limiting it fractional reserve banking to a multiple of ten (investment banks outside the FRS had gotten as high as 24).
Yes, this is what I was taught to me in Macro Economics. What I'm saying has changed since Nov '07 is that they (the member banks) have creeped up and over 100% reserves. They aren't lending, to each other or to patrons, willing to suffer a measly 1% guaranteed return from the Fed than lend it to the next failing industry/investment firm.
If they are forced/coerced into lending, by the Fed reversing the 1% payout to a 5% charge for one example, or simply legislative fiat, then there is likely going to be a fractional reserve explosion. IIRC, that would mean a 9 fold increase in the monetary base in very short order.
I think your mistaking the independent government agency for the actual system.
Lets say you have $1 million in capital... the current allowance is for you to make $10 million in loans. If you refuse to make $10 million in loans... there is nothing I can do. If I lower the 'reserve' amount from 10% to 5%, you could loan $20M... but if you refuse to loan even the original $10M that wouldn't help.
If instead of paying you a dividend on your money, I charge you to keep the reserve with me... you'll leave.
The system is really only designed to protect depositors from loss. Its completely voluntary whether you become a commercial bank within the system, or an investment bank outside the system.
I will first point out that Murray Rothbard's "What Has Government Done To Our Money" explains most of my following points in far greater detail. I encourage everyone to read or listen to it.
http://mises.org/media.aspx?action=category&ID=92
http://mises.org/money.asp
Quote from: drockel on March 11, 2009, 07:13 PM NHFT
I know everyone talks about how they want money backed by gold, but here's a question.
Isn't the amount of value in the world changing on a regular basis?
A loan in a good economy is considered on a balance sheet as money in the bank.
The "in a good economy" phrase points out a lot of the problems we're in.
Quote from: drockel on March 11, 2009, 07:13 PM NHFT
When something goes down in value there is not a decrease in monetary supply,
Actually, due to fractional reserve banking and a lot of other things; there *is* a decrease in the money supply when the value of certain things goes down. This is one of the reasons we're in a depression right now... overinflated house values were propping up a sea of inflated money supply. When the real values of these houses became apparent, suddenly a lot of banks were left with far less measured money backing their loans than they needed, and they became insolvent.
My understanding may be flawed; but I think the end result is the same. Here's a couple of really good podcasts on the topic:
http://www.econtalk.org/archives/2008/09/kling_on_freddi.html
http://www.econtalk.org/archives/2008/11/kling_on_credit.html
Quote from: drockel on March 11, 2009, 07:13 PM NHFT
The opposite should also occur naturally. There is a creation of value in the world due to production and scarcity causing deflation.
Yep. Given a fixed supply of money, everything should slowly get cheaper over time, as increases in efficiency make products cheaper. This is a good thing, as money values would actually reflect true costs, rather than obscuring them.
Quote from: drockel on March 11, 2009, 07:13 PM NHFT
It's the flow of currency and exchange of goods that gives currency it's value. There must be enough currency in circulation despite quantity of goods to maintain trade of goods and services.
Incorrect.
Money is just a commodity.If an apple is valued at $1; then $1 is valued at 1 apple. People buy and sell money in exchange for goods and services. There's no special property of money.
If there was a limited supply of money, the price of money would go up... for instance, you could buy fewer dollars with your apple. The price of the apple in dollars would go down. This is deflation. There is nothing inherently wrong with a deflation. It may have some unpleasant effects for some people; but no worse than (and in fact in opposition to) the bad effects of inflation.
As long as the money is chosen by the free market, any quantity of money is the correct quantity of money. It's only when government manipulates the money supply that we have problems.
This is because they don't add any value to the system; they only take value by printing money at little cost. When you mine gold; it takes labor (consumes value), and the gold has intrinsic value (creates different value -- the value is transformed). This means that the amount of value in the money system stays somewhat constant, and prices don't change.
Quote from: drockel on March 11, 2009, 07:13 PM NHFT
If we would limit the possession of our currency to within our borders we would not have to inflate our money, because it would not go over seas.
Doesn't make any difference. The government would still have every incentive to inflate the currency to pay its debts (because inflation is a backdoor tax, affecting everyone's supply of money).
Quote from: drockel on March 11, 2009, 07:13 PM NHFT
They would have to purchase some security, product or service in exchange for what we import. This would allow for a fluid currency and remove a need to print more money because of hoarding.
The problem with this is that it would severely hinder specialization of labor, which makes everything cheaper.
Hoarding (i.e. burying money in the ground rather than putting it in the bank) doesn't matter worth a whit; except to the bankers who want to loan out as much money as they can (which compounds the inflation exponentially).
Personally, I don't think 'hoarding' ever amounted to much of any problem anywhere. Feel free to correct me with scientific studies of historical examples.
Quote from: drockel on March 11, 2009, 07:13 PM NHFT
I bet if I went out with a troy ounce of gold, I would be hard pressed to be able to buy a meal in a restaurant with it, because the people would have no idea how much I was be over paying for that meal on an oz gold for a meal for 2 exchange basis. ($910 per troy oz today)
The problem there is the same problem that the metric system has in getting established. People know roughly what a 'foot', 'inch', and 'degree Fahrenheit' are, and not what a 'meter', 'centimeter' and 'degree Celsius' amount to. In the same way, they know how many dollars a meal will buy; but not how much gold. If we had gold circulating in the economy, people would start getting an idea, and might choose to use that, because they know that it's a good store of value, unlike the 'dollars' from a government they don't trust anymore.
This is why Roosevelt banned private ownership of gold in 1933... so that people would stop thinking of money in terms of gold, and he could inflate the currency.
Quote from: drockel on March 11, 2009, 07:13 PM NHFT
Do you really want to go back to the old dollar to gold ratio?
Do you really want to exchange all your current money and get fewer dollars back? How about take a cut in pay at your job to be paid in stable dollars. I know quite a few people unwilling to take a pay cut.
Do you want all your loans you agreed to pay which were received in worthless dollars. To have to be paid back in gold backed dollars of the same amount. Just like is it fair that you pay the banks back with inflated dollars for mortgages or credit cars.
Repairing our monetary system is more complex than most people give it credit. You can't just close the Federal reserve and have everything be ok.
Going back to $20/oz gold would be exceedingly painful. It's taken nearly 100 years to get here; and going back to the old standard would really suck if it were done quickly.
My solution would be to let the dollar fade out of use, and reckon everything in grams of gold, or a fraction thereof. 'Dollar' used to be just a name for a certain quantity of gold; until the government divorced dollar from gold and gave the word 'dollar' the aura of what money used to be (through legal tender laws). There's no reason we should be tied to the notional 'dollar', and we're best off to just abandon it.
The Gold Standard was imposed by the Currency Act of 1764... imposed by government (at that time Britain).
Interest rates have a built in taxation and inflationary hedge as part of risk management. So inflating the currency to repay a debt simply increases the interest charged on future debt.
An elastic currency does not equate well to hoarding, nor capital controlling labor through its devaluation relative to commodity.
QuoteAs long as the money is chosen by the free market, any quantity of money is the correct quantity of money. It's only when government manipulates the money supply that we have problems. This is because they don't add any value to the system; they only take value by printing money at little cost. When you mine gold; it takes labor (consumes value), and the gold has intrinsic value (creates different value -- the value is transformed). This means that the amount of value in the money system stays somewhat constant, and prices don't change.
+1, with the addition that the market is perfectly capable of supplying "moneys" other than gold. Most people already keep their long-term savings in stocks and stock index funds. Not only does this protect against inflation, but it addresses the argument that "production of gold for money is a drag on the economy"... not that sound gold-backed money ever kept an economy from growing.
Which part of the Currency Act of 1764 didn't you understand?
Robert Wenzel is one of the few commentators I pay attention to. He has typically been pretty calm but recently has made a few ominous posts. Here is the latest one, which I thought was good enough to warrant sharing:
http://www.economicpolicyjournal.com/2009/06/how-zimbabwe-inflation-could-come-to.html (http://www.economicpolicyjournal.com/2009/06/how-zimbabwe-inflation-could-come-to.html)
That would be the mechanism to hyperinflation, which the division of monetary and fiscal policy is supposedly meant to stop.
Though at any time the Congress could repeal the FED and return monetary policy to themselves.
Its really a balancing act at this time... very dependent on the DVI, as most likely the other countries will forego the 'reserve currency' status of the USD and begin commodity purchase as a means to sustain value.