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Tuesday, February 24, 2015

Therein lies the problem

Zerohedge reports on a world engulfed in debt:
If anyone has stopped to ask just why global central banks are in such a rush to create inflation (but only controlled inflation, not runaway hyperinflation... of course when they fail with the "controlled" part the money paradrop is only a matter of time) over the past 5 years, and have printed over $12 trillion in credit-money since Lehman, the bulk of which has ended up in the stock market, and which for the first time ever are about to monetize all global sovereign debt issuance in 2015, the answer is simple, and can be seen on the chart below.

It also shows the biggest problem facing the world today, namely that at least 9 countries have debt/GDP above 300%, and that a whopping 39% countries have debt-to-GDP of over 100%!
The problem with this can be seen in one of the famous Reinhart-Rogoff papers, Growth in a Time of Debt:
Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. 
And before you cite the well-known Excel error, that changes nothing substantive. The core cause of the global depression is becoming increasingly obvious to everyone. The root of the problem, as I have been pointing out since about 2002, is that in a credit money system, the central banks cannot print borrowers.

This means their obvious next step will be the usual attempt to move the problem up a level by centralizing internationally and pushing for a global currency that will automatically devalue the currencies being replaced by a factor that will reduce debt/GDP below 90 percent.

Labels:

106 Comments:

Blogger Nate February 24, 2015 8:04 AM  

"This means their obvious next step will be the usual attempt to move the problem up a level by centralizing internationally and pushing for a global currency that will automatically devalue the currencies being replaced by a factor that will reduce debt/GDP below 90 percent."

we sure.... that... or Total Global War. Whichever...

Anonymous Salt February 24, 2015 8:15 AM  

Time for the nuclear option; war. Pushing for a global currency is not an option unless one invokes the Krugman - didn't do enough - that the EURO concept just needs to be Global and there would be success. Germany and France can't even handle Greece. The Kool-Aid flows.

Blogger Josh February 24, 2015 8:17 AM  

The McKinsey chart shows that the corporate, household, and financial sectors in the USA have all deleveraged since 2007...

Smells like deflation?

Anonymous George February 24, 2015 8:17 AM  

Can someone explain the mechanism whereby this:

"printed over $12 trillion in credit-money since Lehman, the bulk of which has ended up in the stock market"

actually happens?

As I understand it, the only way a central bank can create "money" is by crediting reserve accounts. And the only institutions that have reserve accounts are member banks.

So does some hedge fund go to a member bank and sell that bank treasuries, and then the bank swaps treasuries for reserves? Do banks profit off of some kind of spread there, buying the treasuries from hedge funds for less than they sell them to the Fed? What is the empirical evidence that this is happening?

OpenID genericviews February 24, 2015 8:29 AM  

...The root of the problem, as I have been pointing out since about 2002, is that in a credit money system, the central banks cannot print borrowers.-- Vox

And as I have pointed out, there are still plenty of borrowers who have no intention of ever paying it back, like the US Govt.

Blogger Josh February 24, 2015 8:32 AM  

And as I have pointed out, there are still plenty of borrowers who have no intention of ever paying it back, like the US Govt.

But can the US Gov borrow enough to make up the credit demand gap?

Blogger Salt February 24, 2015 8:40 AM  

Even if the US Gov't could borrow enough to make up the credit demand gap, where would the money flow? I might see only one possibility - the government as sole employer to the people. I've heard of something like that before, somewhere.

Blogger Josh February 24, 2015 8:49 AM  

Even if the US Gov't could borrow enough to make up the credit demand gap, where would the money flow?

Right now it's flowing into the stock market via corporate repurchases.

Blogger Salt February 24, 2015 8:53 AM  

Right now it's flowing into the stock market via corporate repurchases.

How are the Corps obtaining this government borrowed money?

Anonymous Will Best February 24, 2015 8:56 AM  

See that makes sense. Because the reason 20 odd moderate to good sized countries couldn't function using the same currency when their economies were more similar than dissimilar because there wasn't enough economies of scale. So naturally the thing to do is to increase the number of people using the same currency.

Blogger Josh February 24, 2015 9:02 AM  

How are the Corps obtaining this government borrowed money?

Fed loans money to banks, banks loan money to corporations, corporations buy their own stock.

Because of too big to fail, the US Gov is the implicit guarantor.

Blogger swiftfoxmark2 February 24, 2015 9:17 AM  

And as I have pointed out, there are still plenty of borrowers who have no intention of ever paying it back, like the US Govt.

Granted the US Govt will default on some of their debt, but not all. Remember they did bail out the banks, mostly because the banks have the final say on financial matters in the US Govt.

Blogger James Dixon February 24, 2015 9:26 AM  

> Granted the US Govt will default on some of their debt, but not all.

Most, not just some. But the ones who get paid will be determined entirely by political connections and military power. Anyone purchasing US government debt needs to consider carefully where they fall in that hierarchy.

Blogger Nate February 24, 2015 9:28 AM  

"Fed loans money to banks, banks loan money to corporations, corporations buy their own stock."

Banks also buy stock directly with leveraged "funds".

Blogger Nate February 24, 2015 9:34 AM  

" Remember they did bail out the banks, mostly because the banks have the final say on financial matters in the US Govt."

Bankers always think that. Right up until they are looking down the barrel of the gun.

OpenID simplytimothy February 24, 2015 9:38 AM  

Why the hell did Lot's wife ever look back?

Blogger Geoff February 24, 2015 9:38 AM  

"Fed loans money to banks"

There is really no need for banks to borrow from the Fed except under emergency circumstances. Banks create money out of thin air when they lend. Loans create deposits simultaneously.

And if the Fed were really "printing money" we would have hyperinflation by now. All the Fed is really doing with QE is swapping assets (cash for bonds). Yes, cash is added to the system but an equivalent amount of bonds are removed. If you want to call QE "printing" money you should also call it "unprinting" Treasury bonds.

Blogger Titus Quinctius Cincinnatus February 24, 2015 9:46 AM  

This means their obvious next step will be the usual attempt to move the problem up a level by centralizing internationally

"And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name." (Revelation 13:16-17)

Blogger Josh February 24, 2015 9:49 AM  

There is really no need for banks to borrow from the Fed except under emergency circumstances. Banks create money out of thin air when they lend. Loans create deposits simultaneously.

Because the fractional reserve system ensures every bank is fundamentally insolvent, it's always an emergency.

The Fed loaned over 16 trillion to banks during the financial crisis.

Blogger The Anti-Gnostic February 24, 2015 9:59 AM  

Because the fractional reserve system ensures every bank is fundamentally insolvent, it's always an emergency.

The Fed loaned over 16 trillion to banks during the financial crisis.


To be repaid in real goods and services, and this is why bankers are rich. You see it in watching the price of a bag of groceries go up and up. The stats are flat-out lying; just go to Kroger every week and you can see inflation happening. Purchasing power is steadily transferred upward from later dollar-holders to early dollar-holders.

It can go on a long time but not forever. When this all resets, it will be the world-turned-upside-down.

Anonymous MikeD February 24, 2015 10:03 AM  

Is there a bogus Vox Day blog on wordpress?
I keep coming across what I think to be Vox's blog, but it shows as wordpress.

Anonymous Stilicho February 24, 2015 10:05 AM  

Why the hell did Lot's wife ever look back?

Because she liked it back there?

Blogger Geoff February 24, 2015 10:06 AM  

Throw out your Econ 101 textbook. Banks aren't reserve constrained. Never were. The so-called "fractional reserve system" is bogus and so is the money multiplier.

Banks are capital constrained.

Anonymous Stilicho February 24, 2015 10:08 AM  


This means their obvious next step will be the usual attempt to move the problem up a level by centralizing internationally and pushing for a global currency that will automatically devalue the currencies being replaced by a factor that will reduce debt/GDP below 90 percent.


One bank to rule them all, one bank to find them,
One bank to bring them all and in the darkness bind them...

So, is the Necromancer still laying low in Dol Guldur, or has Sauron made the move to Mordor already?

Blogger Josh February 24, 2015 10:09 AM  

Throw out your Econ 101 textbook. Banks aren't reserve constrained. Never were. The so-called "fractional reserve system" is bogus and so is the money multiplier.

Banks are capital constrained.


You're arguing against a straw man.

However please explain the difference between reserves and capital.

Blogger Geoff February 24, 2015 10:12 AM  

Two different sides of the balance sheet, man. Reserves are an asset of the bank (i.e. left side). Capital is like equity (i.e. right side).

Blogger Josh February 24, 2015 10:18 AM  

Two different sides of the balance sheet, man. Reserves are an asset of the bank (i.e. left side). Capital is like equity (i.e. right side).

And which side is beefed up by loans from the Fed?

Blogger Geoff February 24, 2015 10:28 AM  

A loan from the Fed would increase both the asset and liability sides of the bank balance sheet. So bank capital would not be significantly affected.

Maybe I don't understand your point. What are you trying to say?

Blogger Josh February 24, 2015 10:29 AM  

A loan from the Fed would increase both the asset and liability sides of the bank balance sheet. So bank capital would not be significantly affected.

Then using your own logic, why did banks borrow trillions from the Fed?

Blogger Josh February 24, 2015 10:31 AM  

So bank capital would not be significantly affected.

Gee, what do you think could happen that would affect bank capital?

Anonymous Roundtine February 24, 2015 10:32 AM  

The way things are going, the Russians may not be interested in cooperating on a global currency. The Chinese will be happy to play along for major concessions that put themselves into the more advantageous position.

Blogger Geoff February 24, 2015 10:36 AM  

Lots of things could happen to affect bank capital, but they have little to do with the Fed, or reserves.

Anonymous Porky February 24, 2015 10:38 AM  

I hope the new currency can be worn on your hand or your forehead.

That would be so much more convenient.

Blogger Josh February 24, 2015 10:40 AM  

Lots of things could happen to affect bank capital, but they have little to do with the Fed, or reserves.

No one said they did.

No one is saying that the banks had capital problems because of Fed loans. I thought it was completely obvious that these loans were made because banks already had capital problems.

Blogger Nate February 24, 2015 10:40 AM  

"I hope the new currency can be worn on your hand or your forehead. "

it would be digital. No more pesky printing.

what could go wrong?

Anonymous Roundtine February 24, 2015 10:44 AM  

Then using your own logic, why did banks borrow trillions from the Fed?

The credit creation process involves the Fed buying the assets from the banks for cash, which allows them to lend again. The banks are not lending the money, instead they are holding the reserves on deposit with the Fed for a completely risk free 0.25% interest rate, which does increase bank capital slowly over time.

Anonymous grey enlightenment February 24, 2015 10:45 AM  

For some reason despite this being a scifi /book./politics blogs, economics posts always are the most popular. The same pundits have been predicting doom and gloom since 2009 to no avail. The predicted in 21010 that Greece would pull the rest of the world into a recession - wrong again. There won;t be crisis or anything like that. If people were worried about debt m bond yields would be surging, and they aren't.

Anonymous Donn February 24, 2015 10:46 AM  

Our local supermarket is selling 'breakfast steaks' as thin as deli lunch meat. Literally that thin. But there's no problem with our economy.

Blogger Josh February 24, 2015 10:48 AM  

The credit creation process involves the Fed buying the assets from the banks for cash, which allows them to lend again. The banks are not lending the money, instead they are holding the reserves on deposit with the Fed for a completely risk free 0.25% interest rate, which does increase bank capital slowly over time.

Yes.

However my point was that banks wouldn't have had to borrow from the Fed if they hadn't destroyed their capital position in the first place.

Blogger Nate February 24, 2015 10:48 AM  

"For some reason despite this being a scifi /book./politics blog"

gee... maybe because its just as much an econ blog as it is any of those? Maybe it even started out as MOSTLY an econ blog?

Blogger Nate February 24, 2015 10:50 AM  

"Our local supermarket is selling 'breakfast steaks' as thin as deli lunch meat. Literally that thin. But there's no problem with our economy."

Food doesn't count in inflation figures. and neither does housing... or oil... or gas...

because.. volatile!

Blogger Josh February 24, 2015 10:50 AM  

gee... maybe because its just as much an econ blog as it is any of those? Maybe it even started out as MOSTLY an econ blog?

Wait, it's not a history and theology blog?

Anonymous zen0 February 24, 2015 10:52 AM  

> Why the hell did Lot's wife ever look back?

It just occurred to her that she was going to have to get a new hairdresser?

Speaking of haircuts, what happens when interest rates start rising??

Blogger Geoff February 24, 2015 10:53 AM  

Josh, the Fed loans may have helped with bank liquidity but not capital.

BTW, from where did you come up with $16 Trillion Fed loans to the banks?

Blogger Josh February 24, 2015 10:54 AM  

BTW, from where did you come up with $16 Trillion Fed loans to the banks?

From the GAO.

Anonymous The OASF February 24, 2015 10:58 AM  

We've already got a global currency, the US dollar. Global reserves are not a new idea. I'm not sure why VD thinks this is the next "logical" step when it's already been tried and failed. The specter of the failed EU and the Euro will also linger heavy for decades if not centuries to come. Globalization is in full retreat and won't be making another charge anytime soon.

I believe Pitchfork Pat had it right in his "Where the Right Went Wrong" in that we're headed for a multi-polar world of uneasy alliances and basket currencies, e.g. the BRICS coalition. Where we go from here who knows? I'm guessing massive defaults that may lead to global-scale wars (Nate's theory) but that's a long shot as well. The Bible seems to indicate that if we are indeed living in the last of the last days that there will be one unusual seminal event (probably sponsored by an evil force) that will change the course of history and steer us to our final destination. This theory is as good as any.

I find it ironic that business interests are fleeing from credit and credit cards back to preference for cold hard cash. This may lead to a full blown retreat back to the gold standard, which will annoy the elites but they may prefer it to total and perpetual economic chaos.

Blogger Josh February 24, 2015 10:58 AM  

http://www.sanders.senate.gov/newsroom/press-releases/the-fed-audit

"As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

Blogger Geoff February 24, 2015 11:00 AM  

Are you saying that QE is a loan from the Fed to the banks. If you so, you are incorrect.

Blogger Josh February 24, 2015 11:01 AM  

Are you saying that QE is a loan from the Fed to the banks. If you so, you are incorrect.

I'm not talking about QE. Another straw man.

Blogger Josh February 24, 2015 11:02 AM  

I feel like I'm talking about a football game and some guy keeps asking me questions about baseball.

"That was a nice pass"
"Why didn't he go for a home run?"

OpenID simplytimothy February 24, 2015 11:05 AM  

"I hope the new currency can be worn on your hand or your forehead. "

it would be digital. No more pesky printing.

.....


or a tattoo. A tattoo that, quote, "20 year olds will wear if only to piss off their parents"


Blogger Nate February 24, 2015 11:09 AM  

the Tat... or an implanted NFC chip. There are lots of options.

Anonymous grey enlightenment February 24, 2015 11:10 AM  

lol @ people who have no idea how fed policy works even though they strongly oppose it

Blogger Geoff February 24, 2015 11:13 AM  

I'm honestly not trying to create straw men. But I do agree we appear to be talking about different games.

Let me try this again. You apparently think reserves are really important in the bank lending process. I disagree. Maybe this BOE paper will help explain where I'm coming from:

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Anonymous Athor Pel February 24, 2015 11:19 AM  

" simplytimothy February 24, 2015 9:38 AM
Why the hell did Lot's wife ever look back? "



Because her married daughters were still in Sodom.

Anonymous Roundtine February 24, 2015 11:24 AM  

Along the lines of the discussion: U.S. Banks Hoard $2 Trillion of Ultra-Safe Bonds

Prechter has noted how U.S. banks used to hold a large amount of U.S treasuries. They became very risk oriented from the 70s to the 00s. Now back to prudence.

Not only can the central bank not print borrowers, it can't print risk taking holders of capital. The demographic shift across the world is creating a shift away from financial risk.

Anonymous Stilicho February 24, 2015 11:28 AM  

You apparently think reserves are really important in the bank lending process.

Trust me, he doesn't. We've been through this and back again many times around these parts, long before you started commenting here.

Request for you: define "capital impaired" with respect to a bank.

OpenID genericviews February 24, 2015 11:28 AM  

>Why the hell did Lot's wife ever look back?

OCD. Wondering if she turned off the oven, extinguished the lamps, checked to make sure the dog had water again.

Blogger swiftfoxmark2 February 24, 2015 11:39 AM  

Bankers always think that. Right up until they are looking down the barrel of the gun.

Nate, they provide capital for the guns and ammunition that the government purchases. I doubt they'll be looking down the barrel of the guns they provided.

Blogger David February 24, 2015 11:43 AM  

My question is this: Argue all you want about whether Central Banks are "printing" or not, the result is a tsunami of newly-issued IOU's, mostly "IOU-USDollars," growing at a clearly exponential rate.

If I borrowed stock and sold it, that's a short sale. Central banks are enabling an historically unprecedented "Short Sale" of US dollars.

We are awash in "IOU-USDollars," not wheelbarrow-fulls of $100 bills. Is it not the most realistic notion, that a short squeeze is inevitable? Shares of stock are neither more nor less tangible than Treasury Bonds or Corpororate Bonds.

All are subject to a change in mass psychological perception. Today people (e.g., the Japanese) acquiesce to bonds being issued by the "Spirit of Man"-sized quantity.

Tomorrow, can you be sure that will remain the same? Do trees really grow to the sky?

Blogger Nate February 24, 2015 11:43 AM  

"Nate, they provide capital for the guns and ammunition that the government purchases. I doubt they'll be looking down the barrel of the guns they provided."

Then you're mistaken.

who paid for the gun that is pointed at you right now is only trivial... if you live past the next few seconds.

Blogger Nate February 24, 2015 11:45 AM  

"Trust me, he doesn't. We've been through this and back again many times around these parts, long before you started commenting here. "

waste of time Stil.

Blogger Josh February 24, 2015 11:46 AM  

Let me try this again. You apparently think reserves are really important in the bank lending process.

Where did I say that?

Blogger Nate February 24, 2015 11:47 AM  

'All are subject to a change in mass psychological perception. "

yep.

This was my primary point in the debate.

Blogger Brad Andrews February 24, 2015 11:50 AM  

I would like to see a bit more on what to do. What things should we invest in? Being in the market for the past 5 years or so would have been good for your savings. It likely will not be forever, but where else can you even stay in place, let alone get ahead?

If things go bad enough to collapse, many people will be completely hosed and it is questionable whether investing for that will be productive for all be a very few and likely not even for them.

Blogger Geoff February 24, 2015 11:51 AM  

Stilicho, thanks for the heads up. If you've all been through it this and bank again, I guess it probably isn't worth re-hashing. But there does still seem to be some misconceptions by some here about how the US monetary system really works.

Regarding "capital impaired", I don't know the official definition but I'm going to guess it has something to do with assets being overvalued on a bank balance sheet, and must be written down, causing a hit to capital.

Blogger David February 24, 2015 11:53 AM  

In today's "economics," capital is something Central Banks create at will. If you want to open a business, do you need to borrow anything at all? No, the "bank" gives you "money" to buy all your business plant & equipment and creates that demand from thin air.

This is an open repudiation of Say's Law. It is also an open violation of all logic and reason, as it must imply that consumption can precede production, i.e., that I can borrow the means to buy and eat a burger before it has been cooked, or buy a car before it is even built.

The defining characteristic of a market-based economy is that (scarce) capital is pushed toward its highest productive use. Profits attract capital, losses cause capital to move elsewhere.

Today, a business can sustain losses indefinitely by can-kicking via near-zero-rate loan availability, and banks that refi losers to avoid recognizing their own losses (Japan, for 25 years, China for its Ghost Cities, and everywhere else, to boot.)

Why save and accumulate capital, or nurture the capital you have when it's available in unlimited quantities for a few basis points above room temperature?

The malinvestment of today and the past 40 years must truly be epic. When reconciliation of the books finally arrives, how much wealth today will turn out to be vapor?

Blogger Nate February 24, 2015 11:54 AM  

" But there does still seem to be some misconceptions by some here about how the US monetary system really works."

or maybe people just aren't saying what you think they are saying.

Blogger Nate February 24, 2015 11:55 AM  

"When reconciliation of the books finally arrives, how much wealth today will turn out to be vapor?"

most will assume all of it.. but that's not possible. Wealth is stuff that you have that others want. As long as stuff exists that people actually want.. then wealth exists.

Anonymous Jack Amok February 24, 2015 11:59 AM  

Wait, it's not a history and theology blog?

I thougth it was a football and drinking blog.



Geoff, regarding reserves et al, have you read Vox's Return of the Great Depression?

Anonymous Stilicho February 24, 2015 11:59 AM  

they provide capital for the guns and ammunition that the government purchases. I doubt they'll be looking down the barrel of the guns they provided.

That kind of thinking is a relic of a monetary regime that that simply does not apply to the U.S. Were the banks providing hard money (e.g. gold) to the gov't you'd have a point. If the banks are providing loans of a reserve currency to a gov't that cannot creaqte that reserve currency at will, you'd have a point. As it is,the U.S. banks have been granted the privilege of creating the reserve currency credit money by the U.S. gov't. That same gov't can, if need be, replace the Federal Reserve Note with the greenback issued directly by the Treasury. For now, the gov't prefers to simply issue never-to-be-paid-off IOU's in exchange for FRN's, but if the banks get too squirrely, they'll wake up one morning and find that greenbacks have been declared THE legal tender, exchangeable for FRN's at whatever ratio is acceptable to the gov't. The biggest influence the banks have is bribing politicians. But politicians are famously fickle and unreliable, not to mention prone to violence when they feel threatened.

Now, I don't think this is likely absent in extremis circumstances, but it can be done.

Blogger YIH February 24, 2015 12:03 PM  

MikeD:
Is there a bogus Vox Day blog on wordpress?
I keep coming across what I think to be Vox's blog, but it shows as wordpress.

https://voxday.wordpress.com/, it seems to be a mirror - last actual post June 16, 2011. No activity since.

Anonymous Stilicho February 24, 2015 12:04 PM  


Regarding "capital impaired", I don't know the official definition but I'm going to guess it has something to do with assets being overvalued on a bank balance sheet, and must be written down, causing a hit to capital.


Between "I don't know" and "I'm going to guess" why on earth were you asserting the other day that U.S. banks are over-capitalized (or at least that U.S. banks are not capital impaired)?

Blogger Nate February 24, 2015 12:04 PM  

"That same gov't can, if need be, replace the Federal Reserve Note with the greenback issued directly by the Treasury."

What is this.. the 4th or 5th US federal reserve bank?

That's a nice little reserve bank you have there. Be a shame if something were to happen to it.

Anonymous CunningDove February 24, 2015 12:14 PM  

This means their obvious next step will be the usual attempt to move the problem up a level by centralizing internationally and pushing for a global currency that will automatically devalue the currencies being replaced by a factor that will reduce debt/GDP below 90 percent.

This seems like a logical next step for those who believe that currency = capital.

Anonymous Jack Amok February 24, 2015 12:17 PM  

This is an open repudiation of Say's Law. It is also an open violation of all logic and reason, as it must imply that consumption can precede production, i.e., that I can borrow the means to buy and eat a burger before it has been cooked, or buy a car before it is even built.

That's because most of the politicians and bankers don't have an intuitive sense of production. Essentially none of them have any sort of experience actually producing a good or non-mandated service. But they have lots and lots of experience consuming what others have produced. So they think what they know must be the important thing.

I mean, after all, who's the celebrity, the movie star wearing the gown, or the rubes who sewed it together?

Blogger Cinco February 24, 2015 12:17 PM  

Why the hell did Lot's wife ever look back? "

Short time preferences!

Thread winner!!!

Blogger Geoff February 24, 2015 12:19 PM  

Stilicho,

US bank Tier 1 Capital ratios are currently running north of 13% which is pretty high versus more like 10% in the old days. That's all I meant. I take it you don't trust those numbers?

http://www.bankregdata.com/allHMmet.asp?met=ONE









Blogger Josh February 24, 2015 12:20 PM  

In today's "economics," capital is something Central Banks create at will. If you want to open a business, do you need to borrow anything at all? No, the "bank" gives you "money" to buy all your business plant & equipment and creates that demand from thin air.

1) what's with the scare quotes?
2) if a bank gives you money, in most cases it's because you're borrowing it.
3) what demand is created from thin air?

Blogger Conan the Cimmerian, King of Aquilonia February 24, 2015 12:21 PM  

gee... maybe because its just as much an econ blog as it is any of those? Maybe it even started out as MOSTLY an econ blog?

Wait, it's not a history and theology blog?

It is a gun, killing, and oppression blog! Get it right.

Blogger James Dixon February 24, 2015 12:26 PM  

> What is this.. the 4th or 5th US federal reserve bank?

"Well to tell you the truth in all this excitement I kinda lost track myself. But ... you've gotta ask yourself one question: "Do I feel lucky?" Well, do ya, punk?"

Blogger James Dixon February 24, 2015 12:27 PM  

> I take it you don't trust those numbers?

It's from bankers and politicians. Do you?

Anonymous Stilicho February 24, 2015 1:20 PM  

I take it you don't trust those numbers?

It's the principle (or lack thereof) that they represent that I do not trust. The entire idea of a tier 1 capital ratio merely highlights the inherently insolvent nature of fractional reserve banking. The premise is one of leverage, i.e. merely having enough money that belongs to the bank to partially cover unexpected losses in assets (loans). It is another iteration of the fractional reserve principle (retaining only enough money to meet anticipated short term demand for withdrawal of deposits).

In other words, instead of having sufficient capital to cover losses on its loans (and thus protect depositors from risk of losing deposits), they play a game of holding an amount of capital that they hope will get them by if a few loans go bad. I would much rather pay a warehouse bank a fee to hold my savings and an additional fee for checking services and let them lend their own money (and time deposits designated for lending). Instead, it's leverage all the way down and I'm supposed to sleep easy because I'm "protected" by and FDIC that cannot cover more than the tiniest fraction of deposits. The fundamentally unsound assumption in all of this is that systemic failures (or widespread catastrophic failures if you prefer) cannot happen or are so improbable that they don't have to be accounted for.

Blogger Nate February 24, 2015 1:55 PM  

If you shoot a mime are you supposed to use a suppressor?

Anonymous CunningDove February 24, 2015 2:15 PM  

Nate February 24, 2015 1:55 PM
If you shoot a mime are you supposed to use a suppressor?


Only if you use a 9mm Glock...

Anonymous Stilicho February 24, 2015 2:23 PM  

If you shoot a mime are you supposed to use a suppressor?

Is he likely to complain if you don't?

Only if you use a 9mm Glock...

...although breaking character for some complaints would be justified and more likely to be possible in the first place...

Blogger CarpeOro February 24, 2015 2:33 PM  

"What is this.. the 4th or 5th US federal reserve bank?"

I'd go with 5th. That way we keep up with the number of French Republics.

Blogger Geoff February 24, 2015 2:58 PM  

Stilicho, thank you for being so clear in your reply. When I hear "fractional reserve banking" I think of the money multiplier, with which I have serious issues. However, if you guys are simply talking about the money required to meet anticipated short term demand for withdrawal of deposits, then I understand your point. Finally. Sorry it took me so long. I'm slow.

But that is a liquidity issue. Regarding the leverage issue, which is where I was coming from in the first place, it sounds like you have huge concerns about the banking system in general. Fair enough. Leverage can obviously be dangerous. Even at 13%, it doesn't take a huge writedown of assets to wipe out a bank's entire capital. I’m not here to defend the current banking system as we know it, but I do think it is better than some alternatives.

For example, I like the way the current system is mainly endogenous and flexible. Under your alternative, where banks only lend “their own money” it seems like the money supply would be extremely rigid. Where would the money even come from in the first place?

Blogger Josh February 24, 2015 3:34 PM  

It's not just a liquidity issue.

Anonymous Stilicho February 24, 2015 3:39 PM  

But that is a liquidity issue

No. A thousand times no. It is a solvency issue.

Where would the money even come from in the first place?

Same place it always has.

Anonymous cheddarman February 24, 2015 3:57 PM  

"Same place it always has." Stilicho

ummmm....Personal savings?

Blogger Geoff February 24, 2015 3:58 PM  

How is it a solvency issue?

"Same place it always has"

The money supply currently comes out of thin air from banks when they lend. Loans create deposits. It doesn't sound like that would be the case under your proposal.

Anonymous cheddarman February 24, 2015 4:02 PM  

Geoff,

you should read "america's Great Depression" by Murray Rothbard. He has a chapter in the book about how credit money causes economic boom and bust cycles. Vox posted a link to download it for free above on the right under "nonfiction downloads"

Anonymous Stilicho February 24, 2015 4:25 PM  

How is it a solvency issue?

The banks cannot meet their obligations if called. Liquidity, on the other hand, is just a delay in converting assets to cash to meet obligations.

Blogger Geoff February 24, 2015 4:57 PM  

That is a great definition of solvency. My question was why do you think reserves are a solvency issue? Other countries such as Canada don't have any fractional reserve system at all and they are solvent.

The fractional reserve system in the US is left over from the gold standard era. It is of little use in the modern money era.

Solvency is related to the strength of ones balance sheet, i.e. capital. Not reserves.

Anonymous Geoff-UK February 24, 2015 7:22 PM  

@Geoff,
With all respect, you're in deep water and maybe you want to swim back to shore. For the record, I'm not calling you stupid, just ignorant. It's perfectly respectable to hang back and watch knowledgeable people debate without jumping in--tons of really smart people do it at this blog every day. You've embarrassed me enough to make this my last post under this screenname so that people don't think I'm you.

Anonymous Jack Amok February 24, 2015 11:56 PM  

Solvency is related to the strength of ones balance sheet, i.e. capital. Not reserves.

In the case of a bank, how do you propose the two differ?

Anonymous Stilicho February 25, 2015 9:52 AM  

My question was why do you think reserves are a solvency issue?

They can be a liquidity issue if they are held in a form other than cash. They are a solvency issue because the banks do not have sufficient assets to cover their obligations with respect to deposits. To use an example you have referenced, look at the Basel accords: every asset (debt instrument) held by a bank is discounted for risk of default (other than debt of sovereigns who can print their own currency to nominally repay their debts). Ipso facto, every loan made by a bank is worth less than the cash it transfered to the borrower in exchange.

Other countries such as Canada don't have any fractional reserve system at all and they are solvent.

Prove it. 1) that Canadian banks don't engage in fractional reserve banking, and 2) that Canadian banks can meet all of their obligations if called.

Solvency is related to the strength of ones balance sheet, i.e. capital. Not reserves.

The map is not the territory. Nor will your attempt to use a narrowly tailored definition of solvency change the fact that banks cannot meet their obligations if called.

Anonymous Jack Amok February 25, 2015 11:07 AM  

The map is not the territory. Nor will your attempt to use a narrowly tailored definition of solvency change the fact that banks cannot meet their obligations if called.

Well, he never answered my question on how capital and reserves differred, but if he did, it would be relatively easy to show that if a bank ever had to liquidate non-cash "capital", it would spread the problem to the other institutions who's debt it held, and threaten a chain reaction.

Anonymous Stilicho February 25, 2015 11:15 AM  

Hopefully, he's busy acquiring a basic understanding of the concepts he attempted to discuss here. It's not what he knows that causes him to look foolish, it's what he knows that just ain't so...

Blogger Geoff February 25, 2015 12:45 PM  

OK, this thread is clearly getting stale but I’ll try and answer the last couple of comments directed at me. Then I’ll go, much to everyone’s relief, I’m sure. :)

Regarding the difference between reserves and capital, I answered it above. Look at any bank balance sheet and you will see that reserves and capital are completely different items. They aren’t even on the same side of the balance sheet. Reserves are a bank asset, like cash, and are on the left side. Capital is like equity and is on right side. A simplified bank balance sheet looks like this:

Assets = Liabilities + Capital

Capital is basically the amount by which assets exceed liabilities. It demonstrates balance sheet strength, which is the standard definition of solvency. Stil, you are the one who is using a narrow definition of solvency that gives reserves a level of prominence that is unjustified, at least in today' system. If we lived in some kind of all-cash society, or a gold-backed system, your view might have more merit. But we don't.

Finally, regarding Canadian reserves, check out the paper below from the BOC. Right in the introduction they state that Australia, Belgium, Canada, Sweden and the UK all have ZERO reserve requirements. They all have capital requirements, but no reserve requirements. You might want to ponder why.

That’s it for me on this thread. Thanks for the interaction.

http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-8.pdf

Anonymous Stilicho February 25, 2015 1:42 PM  

Stil, you are the one who is using a narrow definition of solvency that gives reserves a level of prominence that is unjustified

Horseshit. Reserves have nothing to do with my definition of solvency beyond the fact that they are a type of asset available to pay obligations. Assets exceeding liabilities is the only measure of solvency. Let's go to the tape:
Dictionary.com: (solvency)
noun
1.
solvent condition; ability to pay all just debts.

Merriam Webster:
noun sol·ven·cy \ˈsäl-vən(t)-sē, ˈsȯl-\

: the state of being able to pay debts

Oxford: (solvent)
adjective
1Having assets in excess of liabilities; able to pay one’s debts:

You even admitted it here "Capital is basically the amount by which assets exceed liabilities" Yet, you are still completely oblivious to the fact that banks cannot meet their obligations if called because they simply do not have sufficient assets to do so. Banks survive by betting that their current liabilities won't have to be paid currently and profiting off the resulting float. Of course, anyone can pretend that their assets are worth more than their actual market value by ignoring risk factors that require discounting. There is a reason that mark-to-market rules have been ignored or eased for financial institutions, including banks.

Australia, Belgium, Canada, Sweden and the UK all have ZERO reserve requirements

[laughs] you've now taken the retarded position that having even fewer assets on hand makes a bank more solvent. Geoff, you innumerate slut, making the numerator smaller does not improve the ability of the bank to pay out the denominator. That is the pinnacle of fractional reserve banking.

I’ll go, much to everyone’s relief, I’m sure. :)

Nah, the relief occurred while you were here. Comic relief, that is.

Blogger ScuzzaMan February 25, 2015 2:17 PM  

"The borrower is servant to the lender"

Even if modern Christians are not keen students of scripture, the devil is. And since he and his enthusiastic minions share the desire to rule over us all, he and they have concocted a global economy which can only be sustained by ever increasing debt.

Ergo, by ever increasing numbers of debtors, i.e. servants, except that the original word is actually closer to slaves.

Our governments, those thoroughly corrupt lying thieving and murdering machines, have made us all debtors; therefore (by intention at least) all slaves.

Blogger Geoff February 25, 2015 3:40 PM  

I know I said I was gone but I can't let Stil's name calling slide. Who are you calling slut? The BOC paper didn't say reserve requirements are "low". It said they are ZERO, meaning they are irrelevant. This proves my main point which is that banks aren't reserve constrained.

Bank lending is constrained by other things, like capital and the quality and availability of borrowers (hence VD's point about not being able to print borrowers), but banks are not constrained by reserves.


Anonymous Stilicho February 25, 2015 4:06 PM  

Who are you calling slut?

Lighten up Francis, it's a SNL riff.

This proves my main point which is that banks aren't reserve constrained.

Dude, for the umpteenth time, no one around these parts thinks that they are. It has been empirically shown that banks lend first, then seek mandated reserves.

Let me say this slowly: banks do not have sufficient assets to pay their liabilities, therefore they are insolvent. Mark-to-fantasy has apparently convinced you otherwise. Quit trying to direct attention solely to reserves, they are only one part of the asset calculation.

The BOC paper didn't say reserve requirements are "low". It said they are ZERO

Yep. That's why it is ludicrous for you to assert that it is any different in principle from U.S. banking, where, as you admit, the reserves are irrelevant to lending. The reserves are not, however, irrelevant to solvency because they are part of the asset mix that is available to pay liabilities.

Anonymous Sam March 07, 2015 6:04 AM  

There's a key point I saw no one comment on exactly. ALL MONEY in the US is debt based. In the US to create money the treasury must get a debt instrument from the FED. So all this talk about paying off the debt is impossible. If we paid off all the debt we would have NO MONEY under the present system. I know sounds stupid and impossible but that's the way it is. It's set up to take all money eventually and give it to the banks. Example. You need $1 million dollars. You get the $1 from the treasury and agree to pay back $1,100,000. 10%. Where do you get the 10% extra. You HAVE to borrow it because all money is created by debt. So the whole system is unworkable in the long run. We should just print money with no debt. The amount that can be printed should be based on GDP. If inflation goes up, less gets printed.

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