Say a bank receives a $1,000 deposit, being the "reserve" requirement is at ten percent, ninety percent of the deposit is considered to be "excess reserves." This means the bank can turn around and lend out $900 to another customer, which expands the money supply by $900, and, in turn, gets re-deposited into the banking system, where ninety percent of that can be lent out again. Since the "reserve" requirement is ten percent, deposits can be multiplied by ten. The initial $1,000 can be turned into $10,000 through this process of pyramiding credit expansion.
Where did the initial deposit come from? The answer is from government expenditures, made out of revenue derived from bonds. Say the federal government sells a $1 billion bond, created out of thin air and backed by nothing other than the government's power to tax, to Bank A in New York. The federal government now has its $1 billion to spend, and now the FOMC can purchase $100 million of old government bonds. The FOMC does this by writing out a check for all new dollars - expanding the dollar supply - which get deposited into commercial banks
My assessment of returning to the gold standard is that you would have to accept a somewhat reduced world standard of living and anyone who didn't happen to be a subsistence farmer (or someone who supported subsistence farmers, like black smiths) would have to leave the planet.
This is a very interesting point.
In fact, from what little I know of US history, such a situation did occur in the 1890's in the United States.
"President Grover Cleveland, despite winning the 1892 election with populist support within the Democratic Party, gave no support to populist programs. Cleveland saw his main responsibilities as maintaining the solvency of the federal government and protecting the gold standard. Declining business confidence caused gold to drain from the Treasury at an alarming rate. The Treasury then bought gold at high prices from the Morgan and Belmont banking houses at great profit to them. Populists saw this effort to save the gold standard as a direct transfer of wealth from the people to the bankers and as the government's capitulation to international finance capital. Cleveland even sent federal troops to Illinois to break the railroad strike of 1894, over the vigorous protest of governor Altgeld.
The election of 1896 was about the gold standard. Cleveland lost control of the Democratic Party, which nominated 36-year-old William Jenning Bryan, who declared in one of the most famous speeches in US history (though mostly shunned these days): "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." The banking and industrial interests raised $16 million for William McKinley to defeat Bryan, who suffered a defeat worse than Jimmy Carter's. With the McKinley victory, the Hamiltonian ideal was firmly ordained, but with most of its nationalist elements sanitized. It was not dissimilar to the Reagan victory over Carter in 1980. "
As a sidenote, the "Wizard of Oz" is in fact an allegorical fable arguing in favour of the bimetallic standard, silver + gold, over a pure gold standard. In the book, and unlike the movie, Dorothy's slippers are made of silver.
So many of the issues that HT raises have been, in fact, discussed for over a century.
In my view, the fundamental problem with the gold standard is the lack of correlation with the discovery of new sources and their mining with the general growth in the economy.
As for "proving HT right or wrong", from what I recall he's assigned a time window of under one year to his conjecture. So time will tell.
Astute observation E-san. More than Carter though, Clinton was the latterday Cleveland for the Dems. Now we really are at some historic "infarcation point" a la 1896 and the JP Morgan sponsored rise of Corporate America, aka The Matrix. 1896 was the Matrix prototype.
And this board just wouldn't be the same w/o HyTi. Who cares if he is right or wrong - in the end it is all just money, not ego, even if you do happen to find yourself digging ditches for HT
Remember: just follow the Feed. Somebody said that somewhere once.
I have read Peter Bernstein's AGAINST THE GODS three times now, because I find it so challenging and intriguing. In my estimation, it neither supports nor discredits the ability of derrivatives to manage risk. It simply explains the theory, and notes that it is the latest and greatest of the "new, new thing" in risk management. Just as "modern portfolio theory", another Nobel Prize-winning system went awry in the 1987 meltdown (according to Bernstein), the jury is still out on the use of derrivatives, and the understanding of the system by its many new practioners.
Personally, I welcome books and articles that go against my bearish inclinations. I have long realized that my personality is biased toward skepticism, and that has kept me overly pessimistic on many issues.
And what if the widespread use of derrivatives actually does what it promises, i.e. spread risk so wide and so thin that individual catastrophies are offloaded in very small chunks to a very wide cohort of risk takers? I certainly would want to become aware of that. As an options trader (writer!) for 25 years, I absorb as much as I can, pro and con, on the stupid risks that I take every month!
Thanks for the tip on Bernstein's other book(s). That guy has something to say.
And one more thing......Buy the books from DOC!
BudFox - OK, for a minute there I wasn't sure what you were saying. I agree, that if the system holds together through the coming hurricane, and the paper dollar somehow survives, then someday there might come a time when selling my gold and getting back into the paper world will make sense. But I think that day is decades away, IMO.
Hairy - here's one cynic's take...the derivatives complex, ABS, MBS, CDO, etc. is just the way the wise guys created to load up every single bagholder entity they can find on planet earth with inflated and potentially worthless assets, while the fat cats keep the stuff worth keeping and generally collect the fees. Bagholders include: pension funds, insurance companies, retail investors, 401k plans, 529 plans, the list goes on and on and ultimately stops with...YOU! the US taxpayer! (did you read that article from a couple weeks ago by Dr. John Hussman about debt swaps and how they magically turn risky assets into gov't guaranteed assets? I'll see if I can dig up a link) True, the derivatives markets do spread risk far and wide, but not thin. The depth will simply increase with time until something big enough gives way and collapses the whole pyramid. The big boys can never get enough of a good thing. Until the lights go out, it's one big party - there will be no magical appearance of conscience.
So I think the "distribute risk to those better able to handle it" thing is a total canard. The way the game works is that derivatives enable much much more risk to be created and sluffed off on unsuspecting bagholders, until the system will bear no more. And then they'll pile on a little more for good measure, and then finally critical mass will be reached among the bagholder set, and the whole thing will run in reverse. "Assets", aka "debt securities" will be sold for whatever the market will bear, which won't be much, as bagholder nation tries to find other bagholders for its hot potatoes. Like I said, I'm cynical about this crap. Call me crazy.
Another aside - read an article in the local rag today about the 529 college savings plans. Again, these plans look to me like just another way the boyz have cooked up to keep dollars flowing into the paper asset game. Just like 401k's, holders are limited to the usual Fido-style investment offerings. Call me crazy.
He doesn't have a model of the credit system or the pyramid, he doesn't tell what are the layers of the pyramid, he has no data at all to determine the stress points of the model, he doesn't even have a clue how much new credit has to be generated for system to continue standing.. Yet, he has no problem predicting the exact date of the collapse.. Admittadly, those require Ph.D. level work, solid research, intelligence, time and effort..
I see. That's unfortunate. If I understand correctly, what you're saying is that HT is no Doug Noland?
However, that may account for, in part, his rather peculiar but intense dislike of physicists.
[What was that movie with Peter Falk, wherein his radio play kept insulting "Armenians"?]
But now the Druids amongst us will start complaining.
I love Monty Python!
And Eifuku-san is alright by me. But it is true that some on the board are sensitive about their religions. Even though the knowledge that the Japanese are not influenced by Christian doctrine could be useful in certain situations, like in the calibration of Japanese life insurance actuaries. But you have my athiest sympathies.
Ozzieland appears to have even more generous suicide benefits, exercize-wise. So much for that theory
as another aside, I'm no expert historian on this matter, but please don't confuse the "gold standard" that was in place in late 1800's USA with what the Scottish free bankers did a century earlier. Murray Rothbard explains clearly how an efficient, non-political gold standard would work in his Mystery of Banking
Edit2: Eifuku-san, when Hyper speaks of "FRB", he includes the entire fiat-paper-dollar-creating complex, like the GSE's. By the way, here's the Noland archive where he describes thee process by which GSE's create money outside of the Federal Reserve complex. I'd been meaning to re-read this myself. Thanks for reminding me. Noland 2/15/02 My opinion though is that the GSE's mostly serve as a way to dump the risk of mortgages onto the US taxpayer. Who buys most of FNM and FRE's corporate bonds? Banks of course, with fractional-fiat paper tickets. They could lend money directly to homeowners and hold the paper themselves, but why? when all they need do is let the GSE intermediate the deal for a small percentage cut. That way the banks get all the rewards and none of the risks. Beautiful.
Thanks for the kind words. In addition to government inflating of the income figures, there has been pressure on wages as the initial question pointed out. Because of the progressive nature of our tax code (lower incomes -> lower tax percent), part of the reduction in income tax could just be workers getting pushed into lower tax brackets.
...So I think the "distribute risk to those better able to handle it" thing is a total canard.......(more good stuff deleted for brevity.......)Like I said, I'm cynical about this crap. Call me crazy.
I wouldn't call you crazy, nor would Peter Bernstein, probably. His last chapter in Against the Gods (John Wiley and Son, pub.) is titled: Awaiting the Wildness
A few lines....."The effort to comprehend the meaning of nature's tendency to repeat itself, but only imperfectly, is what motivated the heroes of this book. But despite the many ingenious tools they created to attack the puzzle, much remains unsolved. Discontinuities, irregularities, and volatilities seem to be proliferating rather than diminishing. In the world of finance, new instruments turn up at a bewildering pace, new markets are growing faster than old markets, and global interdependence makes risk management increaslingly complex. Economic insecurity, especially in the job market, makes daily headlines. The environment, health, personal safety, and even the planet Earth itself appear to be under attack from enemies never before encountered. The goal of wresting society from the mercy of the laws of chance continues to elude us......."
Your scenario may well come to pass, and Peter's next book might be the HUBRIS OF THE BOYZ
Doesn't that snippet make you want to click on Doc's bookstore now?
Reading your post I've developed the impression that you're not completely in favor of Fractional Reserve Banking.
Let's assume that your conjecture regarding FRB is correct.
I have one question, one that I haven't yet seen addressed by you or other posters.
What system should be put in place of FRB?
The problem may not be the system, but the abuse of the system. Do guns kill, or do people kill? It's all about cycles. Hard work, thrift, and humility, followed by laziness, over confidence, and greed, ended by fear, and collapse. Coming soon to a chart near you, for those of you who are fundamentally challenged!
The 6-10 month window is still in effect and all I'm looking for at this point is visible debt deflation...Because if it shows up there won't be another 550 basis point cut...
Just have to wait and see what they have planed ultimately...I can only put so much pressure on the system...
the quicker it blows the better...
"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money (at the request of the consumer) we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." --Robert H. Hemphill, Atlanta Federal Reserve Bank,1938...
Doc is not predicting the short term future in the ANALS. But I go with PD here, where the NAS leads, the rest follow. I left the miners money alone and brought in some extra money for RYVNX last week. (it saved me on a down gold day)
A bit hot outside to by ng, could be hovering before takeoff. I know gold is in the beginning of a bull market esp. when I can make money in it.
I may sell strength in miners tommorrow but for a up broad market day I will buy more RYVNX.
Sinclair says the government of late is just a bunch of lairs about the economy. I think Stoolville proved that this weekend.
How long will it take J6P to wakeup or will he just sell things off as needed?
Where do I get me that, "power to tax"? That sounds like one heck of a power to base a business model on. I bet I could go public and have a market cap north of Microsoft's if someone gave me the power to tax.
Efk - there's no point in arguing with HyperTiger. I would never have posted here except that I admire all of your posts very much and think that HT's a - well, given the site rules, which I promise to abide by, I can't get into that. Your starting to ask him pointed questions got me interested.
It appears that the current system of FRB has created about $1,200,000 of hard assets per capita in this (US) country (airports, highways, railroads, Marine Corps, hospitals, court houses, apartment complexes, supermodel breast implants, et cetera). If the system collapsed under its own weight tomorrow, those assets would remain hard. It would take us about 2 weeks to figure out how they should be distributed in a manner most likely to motivate our citizens to create more of them. If we had stayed on a gold standard, 99.99% of the human race would probably be wallowing in lovely filth and liking it.
I'm currently betting all of my assets that HT is deluded. Even if I'm wrong, I'll still have a life expectancy of 75 and will live well until I die, most-likely, painlessly. Prior to about 1900, no one ever born could make that statement.
Because it has done so well by me and most of my fellow citizens, I like the current system. I dislike people who don't like the current system out of some mistaken belief that it has failed them because they aren't driving a Porche. If they'd been born 100 years ago, they wouldn't be eating.
You have stated a lot of unsubstantiated assumptions, as if they were fact. The hard assets were created by a hard working, educated work force. I doubt the type of monetary system was a factor. Prove otherwise! Prove Hyper does not drive a Porche! Prove centenarians are starving!
P.S. I find your avatar to be offensive. Do you make fun of all people with physical disabilities, or just the ones you perceive to be less attractive than yourself?
Does anyone have an explanation for how "personal Income" can be rising coincedent with increasing layoffs and lack of employee bargaining power?
I am truly stumped by this statistic and I can't reconcile it with reality. The closest I can come is to posit that goobermint statisticians only count earnings among those currently employed (thereby excluding the unemployed and 'recently discouraged') and divide this number by those currently employed.
Hedonic pricing models, along the lines of "DVDs are dandier than VCRs" means a household's income goes up when it buys a new DVD player. I consider it "pro forma" accounting for households.
All economic disasters can be traced back to some form of state involvement that caused the problem in the first place and then exacerbated it through its continued practice.
To make the case for the converse look at the 90s telecoms market boom which was perhaps the most spectacular misallocation (pissing away) of capital in history, substantially all of which was caused by free market dynamics.
To then believe that ‘state involvement’ in the markets is then necessary and desired to ‘soften the landing’ is more likely to be the domain of a brainwashed and indoctrinated people who do not have iota of real world experience of the nature of real competition or how free markets can function.
To be clear I was primarily referring to markets in the real economy and I stand fully behind everything I already said.
As for intervention in financial markets some is obviously necessary in order to exercise the conventional tools available to central banks to control the money supply under inflation targeting.