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Is The Federal Reserve Insolvent?
With Geoffrey Batt
The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed's endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world's largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed's balance sheet and while we briefly note the liability side, our, and everyone else's, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed's capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.
First, we present the Fed's assets broken down by key segments. The chart below shows the most recently disclosed asset holdings as per the H.4.1 statement. Of the $2.3 trillion in assets, the vast majority, or $1 trillion is held in MBS. As pointed out previously, this is only the settled amount - in reality the Fed has already purchased $1.22 trillion in MBS, which will settle over time. In practice, this merely means that the potential for asset impairment at the Fed is even greater by about 20%.The chart also shows what happens to MBS holdings if haircuts of 5%, 10% and 15% are applied.
Like any balance sheet, where there are assets, there are liabilities, and some version of capital/equity. The Fed's liabilities are two principal components: currency in circulation, which has been at about $900 billion for an extended period of time, and the much more relevant recently line item called "Bank Deposits", which has been popularized as Reserves with Federal Reserve Banks (or excess reserves). The Reserve line has increased from essentially nothing to nearly $1.3 trillion in the span of a few months. Furthermore, as more and more MBS purchased are settled, the excess reserve line will soon reach at least $1.6 trillion, if not more, if indeed Q.E. 2 is launched at some point in the future. The persistent discussions of potential inflation center precisely on the interplay between the green and blue blocks in the chart below: as long as the Currency in Circulation is flat, and Bank Deposits keep rising, the probability of inflation is slim to none. In essence, excess reserves exist only due to the Taylor rule implied negative Fed Funds rate. Should there be a material shift from green to blue, or from excess reserves to currency in circulation, that is when the hyperinflationary threat becomes all too real, as suddenly far too much money will chase a fixed amount of assets. This is also where the discussion about all the various mechanisms that the Fed has at its disposal to moderate tightening comes into play, whether it involves selling of assets, increase of the rate on reserves, or some combination inbetween (we point readers to yesterday's paper from the Minneapolis Fed which discusses these options, and the caveats associated with each). While the asset reallocation debate is very interesting, it is not the topic of this discussion.
The one item on the balance sheet that is often ignored, is the Fed's "Equity", or as it is defined, "Capital." As previously pointed out, this line item is currently $53.3 billion. It is shown graphically in the leftmost column of the chart below, which depicts actual Fed liabilities. Where the interesting part comes in, is when one analyzes what happens to the Fed's capital when the abovementioned MBS haircuts are applied.
A 5% realized haircut on MBS alone would result in a complete elimination of the Fed's capital balance. Applying a 10% or even 15% haircut, results in a capital deficiency of $50 billion and $100 billion respectively. This deficiency will grow as more and more MBS are settled, and as the serious delinquency rate on MBS keeps increasing (no danger in this moderating any time soon).
Now in an environment, such as the one we live in today, when mark-to-myth is the new normal, and when banks are encouraged to come up with creative ways to indicate that their Residential and Commercial Loan portfolios are worth par (despite recent disclosures by the FDIC), to assume that the Fed would do something that lowly depositor banks are told not to do, would be folly. Yet, for those who prefer to live away from Never Never land, and brave this thing called reality, just what will happen if and when the Fed finally does disclose that it is, for all intents and purposes, insolvent?
The pragmatics among you will say: this is irrelevant, the Fed can just print more money and fill in any capital hole. Well, yes and no. As an increase in cash would have to be offset by a comparable increase in some asset, it is not that simple. For a refined analysis of what would happen in that moment of clarity when the world realizes the world's biggest bank is broke, we turn to a presentation by Chris Sims, given before Princeton University, titled "Fiscal/Monetary Coordination When The Anchor Cable Has Snapped." We encourage all readers to read this powerpoint cover to cover, as it discusses precisely the issues were are faced with today: namely a monetary policy that has run amok, seignorage, exploding excess reserves, the impact of these on "power money", and, in general, a Fed balance sheet that is increasingly reminiscent of a drunk, rapid and schizophrenic bull in a China store.
Among other relevant things we note that as the author points-out that "Interest bearing deposits at the Fed do not (yet) count against the Federal debt ceiling" and "if substantial interest is paid on reserves, they could constitute a major leak in the US system for legislative control of debt creation or they are not backed by the full faith and credit of the US government, which has implications for inflation control" - the consequences here are material - with a $1 trillion plus in vacuum interest-collecting paper which in all other world would be counted toward the debt ceiling, the US debt subject to limit would increase from the $12.5 trillion currently to about $13.7 trillion. Add in $6 trillion from the GSEs and America is already at the dreaded $20 trillion threshold. And furthermore, what happens to the interest payments by the Fed should rates go up to 100 bps, 200 bps? On $1.6 trillion in excess reserves this is a material amount that would reinforce inflation in a circular loop, further justifying why the Fed is mortally worried about a rise in rates.
As for the topic at hand, we turn to pp 23-24 of the presentation:
- Central bank operations generate fluctuating levels of net earnings (seigniorage), most of which are turned over to the Treasury as revenue
- Central bank balance sheets sometimes go into the red. The Treasury may then recapitalize it by creating, and giving to the central bank, new government debt
- [The Fed's] Independence meant that the legislature and the Treasury did not complain [much] about seignorage fluctuations or about the effect of interest rate changes on the Treasury's interest expense
- Fed can always "print money" to pay its bills.
- There is no possibility of a run on the Fed, since its liabilities make no conversion promise.
- A commitment to a path for inflation or the price level makes the balance sheet matter.
- Without Treasury backing, the Fed must rely on seigniorage to raise revenues, and that can conflict with inflation-control goals.
So here is the crux of the issue: the only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) singlehandedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: "what is the true basis of your capital account?" And when the Fed is forced to justify a valid response, is when monetizaton will begin.
Since the market deals in expectation absolutes, all it would take for rates to breach the inflection point black swan and commence going up, is the mere possibility of open monetization.
What we hope to show with this exercise is that no course of action, even the one currently employed by the Fed, can continue in perpetuity: you can't have infinitely low housing rates in an environment of exploding delinquencies, as even more MBS are onboarded on the taxpayer's balance sheet. The reality is that inflationary conerns will come to a fore, and have a material impact on rates, the second all these speculations are voiced in a more reputable arena. At that point the game will be up; the Fed's attempt to continue the status quo will be over, and the relentless rise up in rates will begin, culminating with the long-awaited Minsky moment.
As for the timing of this development? We will join the Bob Janjuah camp on this one. While few have the guts to take the money printer head on, doing so early is certainly suicidal. Yet with each passing day, all those who are fully aware that the Fed's course is one of self-destruction, grow bolder, until finally one day a new class of investors - the Fed vigilantes will emerge, looking for cheap opportunities to make a killing (think ABX) on the other side of the "Fed trade", which ultimately will lead to a systemic catharsis of unprecedented proportions.
At that point neither gold, nor lead will be in any way useful. Beta and gamma radiation will make sure of that.
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MsCreant, precisely. In essence, we are all screwed. There is no security, solvency, currency, or solid backing & standards in our system. Our system is a delusion, ended before you or I were born by others for someone elses agenda or their own. It's amazing this delusion has lasted this long, 233 years, and we actually tried to export the delusion to others as the world standard of capitalism at its finest. Some actually believed the delusion we proposed as we fought to spread "free market capitalism." Well, the joke's on us I'm afraid. There is no Mom, apple pie & Chevrolet; only an illusion.
What to do? Start with representatives that are not beholding to special interests or their own delusional lust for power. Who elects these politicos year after year after year when they are crooked & corrupt? Obviously, the US citizens who can't or won't see thru the delusion as they have their own agendas that are less than honest or co-dependent in the delusion.
"We the people" have to change the country. We have very few chances left to do it. If the public fails to change it, it ends. When it ends, it will unravel at a speed that will astound us all. Such is the natural order of change.
Damn how I miss your perspectives when they are absent MsCreant. Sooner rather than later the number of folks who openly and wantonly flip the finger to the unlawful and super constitutional system currently in place will reach a point of critical mass. I trust all is progressing with you. Peace
Fed vigilantes! Necessary and inevitable. But on what time frame and under what conditions? It's a good thing (well, at this point anyway) that the Fed in reality owns the government (at least when advantageous).
But when does it fall? I have to think other central bankers must be asking themselves the same question, which returns us to Liar's Poker with a vengence.
Such interesting days to live in.
What's especially sad is that if the likely wars ensue, these sick fucks will regard millions of lost lives as incidental externalities.
Ever wonder why Capitalism is just a little suspect to some people? Look at the types it promotes.
What can you say except bon appetite without running afoul of its basic premises?
Oh, the paradox.
This is not capitalism. This is Central Planning. If capitalism was at hand we would have no Fed, many failed banks, many failed and resurrected institutions, and be the absolute envy of the world.
I endorse this post.
+2
If we had capitalism there would not be so many failed banks and zombie institutions because they would have NEVER TAKEN THE RISKS IN THE FIRST PLACE. Moral Hazard made all of this possible, thanks to the central planning you speak of.
You know I agree with you, just had to take it a step backwards.
It all is, the system is; FDIC, FED, NBA, MLB, PCP, all of the culture, the people, the police, the schools, man dogs are even going, "WTF?!?!" The banksters are praying...PRAYING...Canter Fitzgerald's Hollywood Futures market can pop em up untill China unpegs and devalues the doelarr. Then the bubble gets pumped again! Go Go godget gold...witches!
I agree. Tyler, you discount that Blackrock has over $3T in assets. JPM has over $2T. Ditto for BAC & C. WFC and GS are above $1T or darn near close. These are the US OWNERS of the Federal Reserve. Since the Fed wont disclose who owns them, we have to go off a very old list. GE, the old National City (now PNC). I wouldn't be surprised if the old Standard Oil (Rockerfellers) have a % share. Standard Oil is primarily XOM, CVX, and BP.
Sum up the total asset base of these companies, you are looking at $12T easy. THESE ARE JUST THE US OWNERS.
What about the British (whom bailed out the original JPM in the run of 1908 that eventually convinced the public, they needed saved and needed a Bank to prevent runs-hahahah!). I would guess Barclay's Capital and other UK banks might have a %.
What about Switzerland? The lone independent state during WWII and again, the bastion of banking secrecy (notwithstanding the US Treasury scare, but the UST eventually backed down from prosecuting everyone on the list!).
Tyler, don't be niave. The Fed is far from broke.
Even if bankrupt, who will foreclose ?
The owners of the Fed have probably pocketed 5 dollars for every dollar of capital in the Fed and they could probably care less if the Fed fails and the party is over. The owners probably have tonnes of private gold and currency as well as miles of real estate and many body guards with machine guns.
Yes, it isn't as if they cannot study the oligarchies in other collapsed or heavily stratified societies to determine how to live best.
The MBS may be the only thing the Fed owns which is worth something.
Think about this. The Fed can print dollars. So owning IOU's for dollars doesn't really get the Fed anything.
If the dollar should become worthless, the only thing the Fed might own which would be worth something might be some of those MBS.
The defaulted ones.
The non-defaulted MBS are IOUs and would be paid back with worthless dollars, however defaulted MBS might have a hold on actual real property.
What else does the Fed own?
Tyler,
Check this out:
http://www.newyorkfed.org/markets/pomo/display/index.cfm?fuseaction=preannouncements&opertype=agny
Outright Agency Coupon Purchase, March 9, 2010, 10:30am
"
Following the conclusion of this outright, the Open Market Trading Desk (“the Desk”) will adopt a practice of conducting outright agency coupon purchases once every two weeks. The Desk may alter this practice as market conditions warrant."
Isn't this what will become known as QE2? Maybe I don't get it.
Er... all the Fed has to do is buy more Treasuries (or for that matter, buy more MBS). Instant solvency.
USA brought it on themselves by promoting trade with China as the cheapest manufacturer while not insisting on a level playing field. Eventually the scales had to tip. Sub prime, loans, toxic debt instruments, whatever, the assets and cash ended up in China. Simple maths. If a man in USA can make a computer for a weekly wage, and a man in China does it for a 10th of that, and lives in a one room apartment with his family in China, then who is going to lose? Common sense 101, trade on a balanced playing field. Floating rates, wages rates, etc. If not, suffer the consequences. Now as the story goes, the pension funds are going to buy the toxic debts. Why? Because the people cannot control these funds and they are not transparent. USA is spending the people silly, raising taxes, debts and now their pensions. End of USA as we all know it.
A quick note here is in order. Some readers seem to have missed the nuance of this post. The question is not, despite what the title implies, whether the Fed is insolvent. That is obviously rhetorical. The real question is what is the cost of solvency. As the fed continues purchasing non-UST securities, which are getting increasingly impaired in a deflationary environment, the only offset to the capital deficiency is, logically, the purchasing of ever more assets, presumably of the UST variety, but with Ben at the helm, Agency and MBS, and even corporate purchases seem likely. This process leads to lower rates and, implicitly, to even more pronounced disinflation, thus, greater impairments (as deflation is the near-term outcome), and so forth, in a closed loop, with the inflationary spring getting more and more coiled (which would presumably drive equities higher, in the paradox discussed by Seth Klarman, whereby both bonds and equities yield greater returns at the same time). This is the real question: the Fed has now found itself in a Catch 22, whereby QE leads to monetization, which would lead to further QE, simply to prevent capital shortfalls. And the offset is greater excess reserves, because the dominant force is the asset composition, not the liability side (at least, that is our view). Within 5 years we anticipate the ratio of currency to excess reserves to be well below 25%. How this fine balance, which like a gyroscope now stays balances until such time as angular momentum disappears (in this case, indirect and PD purchasing of Fed securities gives way completely first to covert and then overt Fed monetization) will play out, is the true topic of future history textbooks.
took the words right out of my mouth!
Buying assets to prop up asset values is a short-term fix and seriously perverts the monetary system in favor of fed insiders. The end game is where they sell the assets back to their friends at pennies on the dollar. Ethically repulsive and morally bankrupt. The system doesn't have to work, it just has to have the appearance of a working system.
So it's QE to infinity then.
A quiet deposit of gold in the Bank Of Gaia, and a proactive attitude towards change seem like good ideas to me.
Demonstrating a friendly and positive demeanor towards those we interact with in the face of the coming changes may be the biggest and most important contribution one can make.
Bingo.
Has Japan stopped QE?
The issue, Tyler, and there really hasn't been a lot of verbiage on this in terms of philosophical posts on ZH, is that the debt-based system has reached a point where real yields of actual economic activity are at or near zero.
At this point, leverage is the only way to generate a nominal return. I submit that real economic activity is now unprofitable. China is living proof; they build things now that nobody needs. Empty cities, idle factories, just to build something. Those loans are guaranteed losses, IOW, 'negatively profitable.'
This implies actually negative real rates of return.
Against this backdrop, of negative economicalness, nobody *should* lend and nobody should borrow. Credit has reached saturation.
At this point, the interest claims of today begin to consume the money supply. While real economies cannot continue to grow unabated, accounting ledger entries such as compound interest CAN!
The Fed has to inject money somewhere just to pay today's interest.
The issue is larger than "solvency" and capital ratios...it's an an artifact of the systemic basis of the Fed and creditmoney system at its core.
Nobody bothered to think through and discuss what would happen if/when the real economy PEAKED. The interest component MANDATES growth and it is clear now that this cannot be achieved. How can credit growth exist in a climate of NO RETURN? That is where we find ourselves.
Travis, I'm not sure if you subscribe to the theory of the NWO, but some believe there are those who DID think about the end of growth. In the following article, Richard Moore makes an interesting point that not only did the PTB fully understand what happens when growth ends, but that they have made the appropriate preparations in order to benefit & prosper from the transition to stasis:
http://www.marketoracle.co.uk/Article17568.html
Capitalism was handy in an era of rapid growth. For an era of non-growth, a different game is being prepared.
This is what it all boils down to. It's terrifying, and inevitable. I wish that the people who played the game determined what new game they would play but they're too busy... playing the game.
Thanks for the link, B9K9
"what is the cost of solvency?"
The doelarr.
If you accept what this system offers, you will continue to provide labor until it devours the principle of labor itself. That is just dumb, UN-American, UN-Constitutional and UN-Holy.
Personally, I have stopped providing labor for this pathetic monetary criminal enterprise. I await my idiot fellow Americans in uniform to point their weapons at me, the weapons some fools still working gave them (majority employed by Government and Wal Mart) the foundation to hold weapons against me. I can here the order now, by order of the President, Barak Hussein Obama, ''GO TO WORK''. Thats when I say again, ''NO!''.
What we have, here and now, is called a sealing, as in ''the prophetic mark of the beast global monetary system of the City of Babylon.
There is a reason why the scriptures says ''Babylon is fallen, is fallen''. The first one became so corrupt it fell to an anointed invader, the night the writing on the wall happened. The kingdom of Babylon was found wanting because, it destroyed the value of an honest days work. That same principle inversion has come to this new world order generation. (a measure of wheat for a penny) This is defined by the prophetic strong delusion which comes, upon the leaders of the nations because, they do not love the truth, they love the delusion of their will above the Laborer of the harvest. Americans had every tool required to sustain order, the Republic, independence, freedom, liberty and justice but, Americans are lost, over run by their own collective delusions. They are too weak and pathetic now to be of any use for themselves and they offer nothing but contempt for the Constitution. This generation has proved that beyond a shadow of doubt. The Fed's ''balance sheet'' is a testimony against every American still showing up to work as usual, instead of standing fast to resolve this insane criminal banking system hell bent on some ridiculous ancient NWO suicide, ZERO Enterprise adventure, designed to establish a single system for the world at the expense of life, liberty, independence, freedom.
You can be sure, the crisis shall come, the ensuing call of peace will also come upon the table after what ever generated crisis kills a bunch of people. That call for peace will last about half as long as one would normally hold their first home in a normal market. From what I see, Iran is the burnt offering and the peace call will be the scapegoat with a mark on it. When you see that happen, it should wake your dusty butt up. Right about now is the time to get the provisions you may need to hold fast for a few years, during the next four and a half years or so, that is unless you accept the mark of the beast.
You can't be insolvent if you can print you own money... add journal entry cash $1,000,000,000,000. There, were solvent again. Happy. Don't ask me about inflation or currencies, those aren't my departments.
History says you are wrong. Why didn't Weimar, Argentina, Zimbabwe print their way to prosperity? Why doesn't everyone just print money and we can all quit working?
Secession!!!
That is your only hope.
(small is beautful)
(Secession & repudiation)
Cause of Today's Economic Crises: Too Much Thrift
In this essay I want to propose that the ultimate of cause of today's economic crises is that we have too much thrift. This view is very similar to John Maynard Keynes' Paradox of Thrift. What I want to show is that this is not a paradox at all but confusion about what saving money really means and what consequences it has. I want to explain this confusion by way of examples and not using technical economic jargon usually used by economists. But before I can go into why too much savings leads to a disaster in the modern economy I need to clarify what I mean by savings and what money is by way of an example:
A baker produces ten loaves of bread. He consumes one loaf of bread. He barters one loaf of bread with his neighbor, the dairy farmer, for one gallon of milk. He barters three loaves of bread for one bushel of wheat with his other neighbor, the wheat farmer for wheat for next batch of loaves he will produce tomorrow. He gives one loaf of bread to the poor. He is now left with four loaves of bread. Now, he wants to be able save these loaves for his old age. So he goes to the market and sells his excess four loaves of bread for four pieces of gold. He saves the gold in his mattress. He does this because he will need loaves of bread in old age when he is physically unable to work.
Note that I am going to define pieces of gold as money for now. Because it is easier to understand. We will then expand the discussion to include fiat money. The baker saved four loaves of bread. That is his savings. Note that it is more proper to think of savings as the loaves of bread rather than the pieces of gold under his matteress. The baker is not really interested in pieces of gold but he is convinced that he can exchange them for loaves of bread when he retires. Because of this belief the pieces of gold give him psychological comfort and peace of mind that he physically owns the asset which he can exchange for loaves of bread.
Note that when he gets to his old age and goes back to the market and attempts to exchange the pieces of gold for loaves of bread he will get back loaves of bread based on the market price (in terms of pieces of gold) at the time of exchange. By acquiring pieces of gold (which is the most liquid asset in the baker's civilization) he has effectively acquired equity shares in the world economy (at least in his gold based money example economy of the baker). The market price (in terms of pieces of gold) of the loaf of bread at the future time will depend on the balance of equity shares (money) trying to purchase (bid up the price) of loaves of bread and the supply of loaves of bread at that time. Note that it is not the absolute supply of equity shares (pieces of gold) that matters what matters is the number of equity shares trying to chase (purchase) the supply of loaves of bread at that time. Another way to make the same point is this: The price of loaves of bread will not increase even if more equity shares are created and handed out unless receivers of the equity shares actually attempt to spend the newly created equity shares.
Another way our baker could have attempted to save his loaves of bread for the future is by exchanging his four pieces of gold for shares of Google stock. This gives our baker a chance to acquire even more loaves of bread if Google makes good profits in the future. Of course, the baker is taking a risk. Google may not be able to make good profits.
Now apply this situation to all excess producers participating in the world markets (by excess producers I mean people like our baker who produce more loaves of bread than they need for current consumption but would like to consume their output in the future). As people become more and more productive there is more and more excess production (if consumption does not increase in tandem with efficiency increases) then this excess production will be directed (by capital markets) to produce more and more assets which can be exchanged ultimately for consumer goods in the future. This is how we get a boom. Bust happens when excess producers realize their assets (like dot com company shares or residential and commercial real estate holdings) will not yield as much return as they expected and may even give a negative return. Rightly, excess producers then rush to safety of the most liquid asset (cash). This causes asset prices to fall and induces managers to reduce investment spending causing unemployment. But this does not mean our ability to produce goods and services has diminished.
If investment slows down and consumption does not increase production must decrease to match the new level of investment. But what usually happens during a period of reduced investment is that consumption slows down as well (unemployed and those fearing unemployment spend less) reducing demand even more and reducing production even more even though our capacity to produce has not diminished during a bust. Slow down of economic activity feeds on itself devastating the economy. In short, too much thrift devastates the economy.
On top of this productivity (output per labor hour) is continually increasing (and has rocketed upwards in the past 100 years). We will have more and more unemployment unless one of following or combination of the following occurs to a sufficient degree to stem the tide of slowdown of investment activity and improving productivity.
1. Increase investment activity. But this won't occur unless #2 below occurs.
2. Increase our consumption. Increase demand for goods and services.
3. Decrease our labor hours. Work less.
4. Do projects which will "use up" excess production.
All the stuff about too much debt (public and private) , falling asset prices and printing money is just accounting entries. We should use accounting to manage the reality around us to improve our lives and not to get confused about what is going on with the production process itself. Bad private debt should simply be liquidated. Falling asset prices does not mean that our ability to produce real goods and services is diminishing. It is in fact it is steadily increasing and has been for hundreds of years. Federal debt can be paid off with newly printed money (this is akin to converting debt to equity). Inflation will only occur if receivers of the new money actually spend it and even then if we run-up against the capacity of the world economy to deliver the demanded output.
Transfer (sale of) of treasury debt to external entities will only become a problem when the United States dollar stops acting like a global currency.
Since the dollar is (at least right now) a defacto global currency it is acting like equity shares in the economic output of the world economy. Of course, United States will not be able to maintain the position of being the sole power to issue equity shares (money) as productive capacity of other major nations increases. There are several ways to resolve this:
1. Trade less. Yes, this will slow down productivity increases. USA will build up less national debt and there will be less unemployment in the U.S. This option is not a long term resolution.
2. Share the power to issue global equity with other major nations and/or major emerging nations on some kind of a formula which everybody is comfortable with. This is a long term solution but requires a major shift in thinking.
3. United States can try to maintain USD as the only legal tender in major international transactions by force (as it does for domestic economic transactions via legal tender laws). This is not a long term solution but may be useful in the short term.
Pure Keynesian drivel. This was proven wrong 80 years ago.
If the baker saves his excess capacity of bread in gold, and the supply of gold remains relatively constant to the supply of bread which is increasing. Then over time, the purchasing power of gold to bread will increase. Or said another way, the amount of gold that will be required to purchase a loaf of bread will decrease (the price falls).
By saving money, you actually believe that the purchasing power of whatever you're saving will increase relative to the supply of future goods you wish to purchase. The reason savers would prefer a stable money supply is that the calculation of future goods available to be purchased becomes much easier.
The boom cycle you're referring to distrupts this calculation through the creation of new money (ususally through the credit process). The only thing that occurs with money printing is pulling consumption forward and changing the time preferences for consumption. But you're also decapitalizing everyone around you who decides to cash out their savings for consumption. Said another way: you can not consume your way into prosperity.
The bust occurs when people realize there's not enough capital to pay for the current production of goods. People begin to recapitalize themselves by saving money, lowering their consumption and lowering demand for current goods. Printing money at this stage mistakes the effect for the cause.
+1
Good comment.
Also wanted to mention Steven Keen, whose work shows how credit-driven economies actually functions.
If you're still a Keyensian in this day and age, it's because you're a religeous moron (in the "economic" sense).
Money, fiat money particklelerly, is a Religious Icon, just like the rosary, the Koran, the Bible.
IF 90% of the world population believe in things that they cannot prove, like the Resurrection, Virgin Birth, a Cow is not just a steak on hoofs, heaven, hell, a flat earth, the infallibility of The Gnome in Rome, not eating meat on Friday, swearing will consign you hell,72 virgins, chopping off the hands of a minor thief, a politician, what they read in the newspaper and on blogs, a dead but very flawed english princess, rock and roll, drugs, etc. then believing that money is solution to their problems isn't so much of a stretch. And for true believers even when there is irrefutable proof that challenges their beliefs, all would rather go to their graves with their beliefs intact than admit that they were wrong to hold them.
The BEST THING that could happen to the US is to stop printing money in any form....
The US ....like Greece ....would be forced to live within its means...
And perhaps when not given these easy out alternatives...will do the required restructuring....
Enough already....
soon enough the american people will "Iceland" the Fed and vote no in repayment of their debt
fuck em
Our economic system exposed in less than one minute, and you will laugh: http://www.youtube.com/watch?v=7GSXbgfKFWg
indeed, LOL
This mode of analysis - gold coins, bakers, loaves of bread is incredibly naive.
Lets say the guy with the gold coins is routinely mugged by the infamous wall street ninjas. The baker is routinely robbed of his loaves etc.
After a while - sure the ninjas will have a lot of gold coins. the question is why would any rational person expend personal labor, creativity or risk any capital - if they feel the system is rigged and they are being routinely mugged? Huh?
No bread is produced, no one really works -no one trusts anyone else - least of all the "authorities". The whole shebang breaks down and your gold - well good luck with that shiny metal .
Its not about money - its about trust,fairness, social norms, customs, rspect and a willingness to be part of a functioning society. If you lose that - money has no meaning.
Then whatchoo gonna do with dem gold coins eh? mebbe swallow a couple and try to flee to some place where they dont know you? Huh?
We all now know the Fed and the banking sytem are Parasites.
The only question is are they "good" parasites.
"good" parasites, successful parasites must ensure they dont kill off the host. This is yet to be seen.
Good if the FR is insolvent. A bunch of bankers and financiers created crap financial products. Now's a good time to re-read A Summary View of British America, August 1774, contemplate what Thomas Jefferson might have thought, and maybe American patriots want to dial back to 1774.
Alexander Hamilton wanted America goverened by financial elites. Jefferson disagreed.
The nuclear option is becoming more and more likely either through direct price raising purchases of Gold by the US Treasury / FED or the BIS allowing a open auction of Physical only Gold by states and/or large non state actors
{ COMEX being in the US and the LBMA being in London leaves the ECB and the BIS with "the nuclear option" if things ever get desperate enough to use it. This nuclear option is A) for the BIS to begin operation of a public "physical only" market for gold to be used by the really giant participants, primarily sovereign entities and billionaires, and B) for the ECB to use the price discovered by the BIS in its quarterly reserve asset "marked to market" adjustments.
Such a move would put Greece, and all the PIIGS for that matter, in a much better position almost overnight. Of course it would have devastating effects on the value of the dollar and the rest of the paper gold market.}
The above passage is taken from a very interesting article below
fofoa.blogspot.com/2010/02/greece-is-word.html
LOL...fofoa is saying the same stuff that got me banned from TF a couple years ago.
I see it the same way; default or devaluation and that political realities make default infeasible. This was my central argument for the inflation case.
The math makes deflation inevitable; people make inflation inevitable. But there is no way out now.
I'm glad to see collective recognition now emerging on this.
Have forwarded a gift for their inspired leadershit to geithner,orszag,bernanke,summers,fink,paulson,greenspan,
rubin,friedman,fuld,frank,cassano,thain,dodd,mozillo,o'neal,bush,clinton,and rainieri
http://3.bp.blogspot.com/_NhB2OM8hE1A/SekweRMKDGI/AAAAAAAAACM/_Gg0cV_jai...
Stupid is as stupid does.
- Next Fed Chairman - Gump
Mises.org brought up the same issue over a year ago without the benefit of hindsight:
http://mises.org/daily/3281
"The Insolvency of the Fed"
No worry; the tax payer has your back, Mr. Fed.
Yes, the Fed like many other institutions is technically insolvent. However, it will never be allowed to fail. The Fed, the government and our corrupt politicians will ensure that unless we force a change in the system. That change can be found at SwarmUSA.com. It is spelled out in Freedom's Vision and promoted by The American Party PAC. Go there, read what is on the site and if you agree with the concepts set forth please join the movement. If we do not force change in the system the middle class will be eventually regulated to the status of serf and we will be ruled by a plutocracy in a soci/fascist style government.
TD please fix Sims' attachment - it cannot be viewed or downloaded as PDF.
No. they have negative equity with infinite ability to print.
HAHA. Gold Beyotches!
http://www.youtube.com/watch?v=rq0Ez7DZSnI
I wouldn't worry about gamma radiation - I say this again: debt is an ACCOUNTING ENTRY.
It's a paper artifact. It, by itself, has NO force and effect in the real world except what WE give it.
We are facing an existential crisis in PAPER and specifically in the future's ability to pay today's coupon, and nobody seems to see this forest.
The bottom line is that the energy peak has created a real economic peak in terms of output...it has rendered growth impossible. If we discover a new growable source of energy, then our system can continue growing. We can make more things, drive more cars more miles, etc. This is what "economies" are. Until/unless that happens, we face inevitable contraction.
I have talked about this for years now; the forecast is sustained global recession. This is how it must be. But, in the meantime, we CANNOT allow fucking accounting entries to precipitate the destruction of our societies!
There does appear to be a good development out in the real world, that people are walking away from debts. Contrary to what the "prudent" think, these people ARE being prudent! Debt is a state of mind. We the People have to cast off this system before it destroys us. We need a critical mass of the rejection of debt, right down to the core of our monetary system.
trav7777,
You hit the nail on the head man, ENERGY PEAK, it's the one thing nobody is talking about, but it is the underlying, fundamental problem we face. We are looking at a catastrophic depletion of oil in the next 10-15 years, industry experts, such as Kenneth Deffeyes is predicting a 90% drop in oil production by 2020. 10 years from today, we will literally be living in a different world...if we are still living.
http://www.youtube.com/watch?v=QovBLFZhQME
....and this why they shelved the electric car for a decade. Now they will "save us" with it's release at peak oil (peak everything). Oh Hell all over yah!
how can a farce be solvent or insolvent?
the fed is a pile of shit
How can a farce be solvent or insolvent?
Red pill or blue pill? It doesn't matter at all, the stuff is in the glass of water that you're going to drink anyway...
Try something different: Crom Alternative Currency System - Alternative Economic Approach To Sustainable Development
http://cromalternativemoney.org/index.php/en/media/news/alternative-econ...
"the only way to deal with a mark-to-market of the Fed currently is to embrace monetization."
bullshit....the fed is insolvent and should declare bankruptcy and be raized to the ground....we don't need no stinkin fed to conduct commerece....fuck the fed, fuck the treasury, and fuck the assholes defending monetization.....
gold is the solution. the fed is a fraud collaborating with an indonesian citizen fraud in the white house....
TD, Batt and any others that were part of this peice, amazing work!!
Thanks again for giving so much.
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Can they ever be insolvent if the dollar says on it "Federal Reserve Note"? I don't think so.
Even the risk of running out of paper will not result in insolvency. The wonders of scientific notation and floating point arithmetic will allow them to just keep on doing the Robert Mugabe trick of putting zeros on the end. The question is when the rate of expansion makes holding anything denominated impractical.
When you need track shoes to run to the bank to cash your paycheque and buy bread before it drops too much in value, that's when they have to press reset (new currency, massive rates).
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