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Guest Post: U.S. Dollar Money Supply Is Underreported

Tyler Durden's picture





 

Submitted by James Turk, of FGMR.com

US Dollar Money Supply Is Underreported

March 1, 2010 – As the financial crisis has unfolded over the last
two years, the Federal Reserve has been responding in a variety of
unprecedented ways.  Therefore, it is logical to assume that these
never-before-used actions have altered long-established ways of viewing
things.  One area that has been impacted is the US dollar money supply.

The quantity of dollars in circulation is being underreported by relying upon the traditional and now outdated definitions used to calculate M1 and M2
These ‘Ms’ are calculated and reported by the Federal Reserve based on
the following guidelines that identify the several different forms of
dollar currency used in commerce:

M1: The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the Treasury and depository institutions), minus cash items in process of collection and Federal
Reserve float.

M2: M1 plus savings deposits (including money market deposit accounts) and small-denomination (less than $100,000) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments of less than $50,000), net of retirement accounts.

These esoteric definitions can be confusing, so let’s bring US
dollar currency back to basics as the first step to explaining why
these definitions are no longer adequate. 

There are two types of dollar currency comprising the money supply –
cash currency and deposit currency.  Both are used in commerce to make
payments. 

1) Cash Currency

The cash currency we carry around in our pockets is issued by the
Federal Reserve.  Take a look at one of those green pieces of paper,
and you will see that they are labeled as a “Federal Reserve Note”.  A note
is a debt obligation, and a few decades ago one could take that note to
a Federal Reserve Bank and ask them to make good on their debt by
redeeming it for silver, or until 1933, gold.

These liabilities of the Federal Reserve are no longer redeemable into anything, and are therefore “I owe you nothing” currency, a phrase made famous by legendary advocate of sound money, John Exter.  Nevertheless, Federal Reserve notes remain a liability of the Federal Reserve.  

2) Deposit Currency

Deposit currency is comprised – as its name implies – of dollars on
deposit in the banking system.  These dollars circulate as currency
when payments in commerce are made with checks, wire transfers, plastic
cards and the like.  In contrast to cash currency which circulates from
hand-to-hand, deposit currency circulates from bank account to bank
account. 

Bank deposits take three standard forms – checking accounts, savings
accounts and time deposits.  They have different maturities, or tenor, to use a banking term.

Dollars in checking accounts are considered to be the most liquid
because they are available on demand.  Therefore, they are part of M1
because they are the most likely deposit currency to be used to make a
payment in commerce.  Dollars in savings accounts are less likely to be
used to make a payment, but nonetheless are currency because they are
spendable.  So they are part of M2, which comprises those dollars less
frequently used as currency. 

The dollars in time deposits are used even less, but are currency
and therefore available for use in commerce when they mature, or
immediately if the tenor of the deposit is broken.  They are –
depending on the size of the deposit – included in M2 or M3, which is no longer disclosed by the Federal Reserve.
 
Creating Currency

Having provided this background information, we can now get to the
heart of the matter by looking at how currency is created ‘out of thin
air’ by the Federal Reserve and banks and the impact of their actions
on the monetary balance sheet of the US dollar.  

Cash currency of course is simply printed, but every note issued is
recorded on the Federal Reserve’s balance sheet.  Basically, the Fed
‘monetizes’ an asset by turning it into currency. 

If, for example, a bank sells a $1 million T-bill to the Fed, the
Fed ‘pays’ for it with $1 million of newly printed cash currency.  The
Fed records the T-bill as an asset and the cash currency it issued as
its liability.  These Federal Reserve Notes are the “currency”
component in the definition of M1 above.

The creation of deposit currency is similar.  When a bank makes a
loan or purchases a security, it records the loan or security as its
asset and creates deposit currency as its liability.  Simple
bookkeeping entries increase the bank’s assets and liabilities by the
same amount. 

New deposit currency is created because the bank deposits the amount
of the loan in the borrower’s checking account, or similarly, credits
the account of the seller of the security it is purchasing.  These
dollars are now available on ‘demand’ of the borrower or the seller of
the security.

Regardless whether deposit currency is created by the banking system
or the Federal Reserve, the net effect is the same – the quantity of
dollars increases.   The total amount of deposit currency in checking
accounts is the “demand and other checkable deposits” component in the
definition of M1 above.

Measuring the Quantity of Dollars

As of January 31st, the quantity of cash currency in circulation (i.e., not in bank vaults) was $860 billion.  This amount comprises 51.3% of M1, which equaled $1,676 billion on that date.  As of January 31st, the quantity of demand and checkable deposits in circulation was $810 billion.  This amount comprises 48.3% of M1.

For historical reasons unimportant to the point of this analysis,
the Federal Reserve in the past has only created cash currency. 
However, the unprecedented changes it has engineered over the past two
years have resulted in a vast amount of deposit currency being created
by the Fed.  Instead of purchasing paper from the banking system solely
with cash currency – its traditional form of payment to ‘monetize’
assets by turning them into currency – the Federal Reserve since the
start of the financial crisis has increasingly relied upon deposit
currency to purchase paper.

Regardless how the Federal Reserve pays for the paper it purchases –
cash currency or deposit currency – it is creating dollar currency and
perforce expanding the money supply.  But the traditional definition of
M1 does not accurately capture this process when the Fed uses deposit
currency to pay for its purchase.  In fact, it is totally excluded. 
Because the Federal Reserve did not create deposit currency in the
past, none of the Ms take it into account. 

Consequently, the traditional definitions of the Ms are outdated
because they do not capture the total quantity of dollars in
circulation.  Because M1 is underreported, so too is M2.

Unprecedented Deposit Currency Creation by the Fed

There has been an unprecedented amount of deposit currency created
by the Fed over the past two years.  The following chart illustrates
this point.  It shows the quantity of demand and checkable deposits, i.e., the amount of deposit currency, at the Federal Reserve since December 2002.

From December 2002 until the collapse of Lehman Brothers in
September 2008, the quantity of deposit currency created by the Fed
averaged $11.8 billion, an amount that is relatively insignificant
compared to total M1.  Presently, it stands at a record high of
$1,246.2 billion, which of course is highly significant. 

More to the point, none of this deposit currency is captured in the
traditional definition of the Ms.  The quantity of dollar currency is
therefore significantly underreported, which is illustrated by the
following chart.

The Federal Reserve reports M1 to be $1,716 billion
as of February 15th.  When deposit currency created by the Federal
Reserve is added to the traditional definition of M1, M1 after
adjustment is actually 170% higher at $2,918 billion.  Its annual
growth increases to 29.5%, nearly 3-times the rate reported by the Fed
and more importantly, is an annual rate of growth in the quantity of
dollar currency that is approaching hyperinflationary levels. 

This restatement of M1 explains why crude oil is back at $80 per
barrel; copper is $3.25 per pound; and commodity prices in the main are
rising in the face of weak economic conditions.  The US dollar is being
inflated and worryingly, the rate of new currency creation is
approaching hyperinflationary levels.  Unless the Federal Reserve
changes course, the US is headed for a deposit currency hyperinflation like those that plagued much of Latin America in the 1980s and 1990s.

 


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Tue, 03/02/2010 - 13:23 | Link to Comment Hondo
Hondo's picture

And the money (credit) the CDS market creates??

Tue, 03/02/2010 - 13:39 | Link to Comment mblackman
mblackman's picture

Like CPI, GDP and a host of other government agency generated numbers (the Fed is a govt agency no matter what politicians may say), money supply statistics have been so heavily manipulated (or removed in the case of M3) as to make them virtually worthless for any practical application. I have found adjusted monetary base to provide the best picture of what is going but am waiting for the Fed to bastardize that number to also render it virtually useless....

Looking at the bigger picture, in the history of every fiat paper currency in history without exception, the end has always been the same. Populations lulled into a false sense of security by the politicians, are left with a worthless currency then must quickly learn to fend for themselves in the inevitable economic upheaval. 

Tue, 03/02/2010 - 15:19 | Link to Comment the grateful un...
the grateful unemployed's picture

http://research.stlouisfed.org/fred2/series/BASE

the adj monetary base number is off the chart as well, 2200 or so B.

Tue, 03/02/2010 - 17:58 | Link to Comment Anonymous
Tue, 03/02/2010 - 13:40 | Link to Comment GlassHammer
GlassHammer's picture

So its not the unstable Euro?

 

Tue, 03/02/2010 - 13:41 | Link to Comment SDRII
SDRII's picture

hyppppperventilating

Tue, 03/02/2010 - 13:49 | Link to Comment Ripped Chunk
Ripped Chunk's picture

Really?

Can't be those "direct bids" at T auctions?  It can't be.

Tue, 03/02/2010 - 19:44 | Link to Comment johngaltfla
johngaltfla's picture

That smells more like the Pirates of the Caribbean doing their laundry work, IMHO.

Tue, 03/02/2010 - 14:18 | Link to Comment chumbawamba
chumbawamba's picture

GOLD BITCHES!!!

I am Chumbawamba.

Tue, 03/02/2010 - 16:11 | Link to Comment Anonymous
Tue, 03/02/2010 - 18:02 | Link to Comment aaronvelasquez
aaronvelasquez's picture

Welcome back.

Tue, 03/02/2010 - 18:04 | Link to Comment Celsius
Celsius's picture

GOLD BITCHES!!!

I am not Chumbawamba.

Tue, 03/02/2010 - 14:30 | Link to Comment Ludic Fallacy
Ludic Fallacy's picture

Let's see.  Articles showing distortions and ponzis in the gold market, massive fraud at the Federal Reserve and distortions of the money supply.  It would be hilarious if it wasn't so sad.

 

I must say, though, that I must take any website's (schlepping gold reports - and with that I mean the linked site, not ZH) white papers on US monetary supply with a grain of salt, or at the very least, their conclusions.  We are in a deflationary debt cycle right now, and the only way to "combat" the destructive nature of this (if you consider the destruction a bad thing, I don't) is massive inflationary tactics.  Obviously monetary supply is outrageous right now, and obviously a central banker would do so.  Hell, Bernanke even said that he would fight the Great Depression by dropping cash from helicopters.

 

It seems "apparent" to me that rampant inflationary tactics are being done to stave off the Greatest Depression.  Whether or not the central bankers can reign (double entendre) in all that cash once (if) things normalize is the big question. 

Tue, 03/02/2010 - 15:03 | Link to Comment pidge
pidge's picture

 Whether or not the central bankers can reign (double entendre) in all that cash once (if) things normalize is the big question. 

right.  isn't that where they always go wrong?  It's impossible to know exactly when the rubber meets the road and traction is gained, but the gas peddle is floored so the car takes off at full speed.  aka:  hyperinflation.  Isn't a severe deflationary period always the predecessor in hyperinflation?

Tue, 03/02/2010 - 15:04 | Link to Comment faustian bargain
faustian bargain's picture

Nice name.

Tue, 03/02/2010 - 15:42 | Link to Comment SV
SV's picture

"So, a Ludic Fallacy and a Faustian Bargain are at a bar..."

Sound like a start to a good chuckle!

Tue, 03/02/2010 - 22:52 | Link to Comment baronvonbull
baronvonbull's picture

Otherwise known as "Just another day at the Fed" ;)

Wed, 03/03/2010 - 12:29 | Link to Comment trav7777
trav7777's picture

It's worse than that.

What has happened is that debt as an institution has reached its ceiling.  It cannot grow anymore.

It took several centuries, but it happened coincident with the peak in the energy supply curve.

Everyone in the room realizes that there is NO WAY IN HELL these debts can be paid off by tomorrow's production.

That's why every government now looks like end-stage Bamboo Lounge

Tue, 03/02/2010 - 14:35 | Link to Comment Anonymous
Tue, 03/02/2010 - 14:47 | Link to Comment Anonymous
Tue, 03/02/2010 - 16:05 | Link to Comment faustian bargain
faustian bargain's picture

This money is not in circulation meaning it as useful as cash buried in a cave. It has no impact on the economy.

I don't think that's an accurate thing to say...just the fact that the money is in existence has an impact on the economy. Doesn't matter where it is, it only matters that there is an unpredictable potential for it to be used.

Tue, 03/02/2010 - 23:38 | Link to Comment TheGoodDoctor
TheGoodDoctor's picture

You know I just keep thinking the PPT is just handing money over to the banks through HFT. And I wonder how much is really being sent out via unemployment. Do these have any impact on the M3 and money reaching the public?

Tue, 03/02/2010 - 16:17 | Link to Comment Anonymous
Tue, 03/02/2010 - 14:51 | Link to Comment Shameful
Shameful's picture

Ughhh just what daddy likes more bad news. What concerns me more is since there is no audit or over site of the Fed we simply have to believe they are telling the truth. But I assure you they are not. After all think if you were Fed Chairman or had a stake in the Fed, would you accurately report or would you kick a little something into your own account? After all it's not like you will be caught. If the rest of the currencies weren't also trying to kill themselves the dollar would be in very very bad shape.

Which brings me to an interesting point. People talk about a weak currency as good because it makes it easier to export. Weak currency really means lower wages, so why don't we just allow the market to set wages in real terms? I mean aside from the financial powers get a huge benifit out of getting loads of freshly created electron based cash. Or is it that people cannot stand the idea of taking a nominal pay cut but will line right up for a real pay cut?

Tue, 03/02/2010 - 15:34 | Link to Comment Anonymous
Tue, 03/02/2010 - 16:21 | Link to Comment Shameful
Shameful's picture

Your right it makes the debt unsustainable. But inflating the debt away is still a default and if you must inflate or default then it's just two flavors of default. One way is an honest default that leaves the country intact though with difficulty attracting capital, but free of interest payments. The other is a nightmare ride through hell that changes the very nature of a country. I know which one I would pick. Deflation is seen as an evil, but when you have an inflationary boom you must have a deflationary bust. when you try to paper over it you end up with a cure that is worse then the disease.

Think Monty Python "10 patients missing presumed cured" with the "explosive" treatment.

Tue, 03/02/2010 - 15:13 | Link to Comment Ludic Fallacy
Ludic Fallacy's picture

Pidge, I must say you make a good point when it relates to famous German history.  I'm not sure in the case of Latin American / Eastern European hyperinflation though.  I'd like to see the numbers, but I just don't know where to look.

 

All of this economic, top-down management makes me incredibly nervous.  I like defaulting to smart people who have come before us, and Hayek's speech at the Nobel Prize ceremony really does it for me.

Tue, 03/02/2010 - 15:31 | Link to Comment Anonymous
Tue, 03/02/2010 - 15:33 | Link to Comment Anonymous
Tue, 03/02/2010 - 16:19 | Link to Comment Anonymous
Tue, 03/02/2010 - 17:49 | Link to Comment Anonymous
Tue, 03/02/2010 - 19:08 | Link to Comment goldfreak
goldfreak's picture

It doesn't matter who physically prints it, the dollar is a Federal Resrve Note printed at its request

Tue, 03/02/2010 - 15:49 | Link to Comment the grateful un...
the grateful unemployed's picture

look at the feds adjusted monetary base and you see the same thing. of further interest is looking at the pre crisis charts, where the rate of growth is absolutely dwarfed by the current volume, you can see that between 2003 around the time of the market bottom the figure was about 750B, and that it rose modestly over five years to almost 900B, but YTD it has risen from 1600B to 2200, since July 2008 from around 800B. That's a triple. Is the crash warning??

Tue, 03/02/2010 - 16:03 | Link to Comment Anonymous
Tue, 03/02/2010 - 16:50 | Link to Comment carbonmutant
carbonmutant's picture

Anybody see this post on Nathan's Economic Edge? Scary Charts...

Economic Reality Check…

...latest updates from the St. Louis Fed…

Many people get all wrapped around the axle about debt to GDP statistics. This is a complete Red Herring as comparing our Federal Government’s debt to the productivity of the nation is exactly the same as comparing your personal debt to the productivity of your neighborhood. They are unrelated.

What is completely related and totally relevant is DEBT to INCOME. In fact, in regards to debt, income is the only thing that really matters. Our Nation’s Income is crashing as shown in this chart expressed in year over year (yoy) change in Billions of dollars:

http://economicedge.blogspot.com/2010/03/economic-reality-check.html

 

Tue, 03/02/2010 - 16:58 | Link to Comment Anonymous
Tue, 03/02/2010 - 17:05 | Link to Comment Anonymous
Tue, 03/02/2010 - 23:00 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

The deposit funds that the Fed has created are re-deposited back with the Fed to earn "free interst." The amounts are so huge (at $1.2 trillion) that over a course of years, even black holes left by the destruction of wealth in the Great Credit Crash of 2008 will be filled, at least nominally by freshly printed dollars, thus repairing the bank's balance sheets.  And in the meantime, a portion of the cheap money can be used to fund the prop desk operations to earn even more money.

But this money is in no way a source of future inflation - it has to be loaned out! And that folks ain't happening for as far as the eye can see. 

Tue, 03/02/2010 - 17:12 | Link to Comment Ludic Fallacy
Ludic Fallacy's picture

I think it's unfair to attempt to predict, although it's predictable that we do, future hyperinflation, stagflation, or deflation.  The fact is, the (global and US) economy is far too complicated for us to predict how individuals react to macroeconomic variables.  While many can say hyperinflation, stagflation, or deflation are possible, could it be something else, something far worse than we could ever conceive.  What if people decided paper money, as created by our Federal Government and World Central Banks/Treasuries, was worthless and decide to dump the whole system for a pre-industrial barter system?  Unlikely, but it would change the world.  We who live in the financial world would cease to have importance in such a system.  We would be irrelevant with our current skillset. 

Tue, 03/02/2010 - 17:36 | Link to Comment Anonymous
Tue, 03/02/2010 - 17:39 | Link to Comment glenlloyd
glenlloyd's picture

With all the other Govt shitnanigans this should surprise no one.

Tue, 03/02/2010 - 17:51 | Link to Comment faustian bargain
faustian bargain's picture

Here's an interview of the guy who wrote 'The Creature From Jekyll Island'. He breaks down the Fed's money-creating mechanism pretty well for simpletons like myself.

http://www.beearly.com/pdfFiles/Jekyll10112006.pdf

Tue, 03/02/2010 - 18:33 | Link to Comment hooligan2009
hooligan2009's picture

couple of points. one, dollars are created out of thin air by the Fed, which cost only the paper they are printed on (and the ink). If this was good policy, Japan would have somewhat less than a Govt Debt to GDP of 250%, and more importantly, we could set any level of growth or employment we chose, simply by telling the Fed to use its brains to set such growth and employment. This is patently false and is tantamount to communism via a centrally planned economy. Communism failed, not because, esoterically, it was not fair, but because people lied when they failed to meet goals set by the state. We are caught in the same vice. Debt is exploding at the fiscal level, the Fed is just a paper supplier, performing no social function whatsoever and we have found our companies lying about just about everything, supported by a whole host of regulators and accountants. This article skirts around the topic and the posts flesh it out a bit. But I have heard no-one even begin to broach the fact that there are more dollar deposits outside the US then inside. This became the case in the early 90's (no comment on corruption being exported to corruptible foreginers) and is still the case today even with the Fed trying to build a circle line of dollars going round the equator at ever increasing speeds with no-one able to pick any dollars off. Other central banks have even bigger printing presses, and aorund 3/4 of the worlds currency is either dollars or pegged to the dollar or defined by the dollar. The US economy is less than 1/3 of the world economy by now, so i guesstimate that there is around more than twice as many dollars supplied outside the US compared to inside.

Tue, 03/02/2010 - 23:05 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

Interesting point and one which illustrates the strength of being a reserve currency - economies outside the issuing economies decide to use the currency for money provide an additional booster to the fiat's value, even as the issuing country takes steps that arguably debase the currency - one side increases "inherent value", the other forces it down, and  -voila- a sort of currency equilibrium results that benefits intra-issuer users as well as extraterritorial users. Fascinating.

Tue, 03/02/2010 - 18:43 | Link to Comment Anonymous
Tue, 03/02/2010 - 19:49 | Link to Comment johngaltfla
johngaltfla's picture

The money has been used to write off losses for prior ABS/MBS blow ups. They have been hoarding cash knowing damned well that the banks are unable to absorb the hits projected for the future thus why they are counting on a long term perpetual easing cycle until the bad assets are totally monetized or absorbed by the public sector (us). If the banks had to actually mark the value of the crap they are holding at 90-93% of par on their books and put it at current market value, well over 60% of our banking system goes 'poof' overnight.

 

Hell, there wouldn't be a bank left in Florida.

Thus why the problem for old Benron and the boys; if they quit QE in March, once the remaining cash filters into the banking system from last year's experiment and the liquidity is withdrawn, odds are we will experience a severe deflation (monetary contraction at a -7% or greater level) which will absolutely decimate the economy for two more years or a decade plus. We either delever or monetize; care to guess which path the politicians choose and force Benron to take?

Tue, 03/02/2010 - 20:48 | Link to Comment the grateful un...
the grateful unemployed's picture

Re: Bob Prechter, printing hard cash is the slowest way to induce inflation in the system. Which brings up the question, if you're trying to reflate the economy why choose the least effective path. However if you look at the adjusted monetary base during the 2008 crisis you see essentially a moonshot. The accelerating rate of money entering the system is more worrisome than the raw numbers.

Tue, 03/02/2010 - 23:07 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

. . can only enter the system via the bank reserves if the funds are lent out. Or if assets increase on the 10x money creation system. . . still right now, lending has all but halted, ergo:

D-E-F-L-A-T-I-O-N.

Tue, 03/02/2010 - 19:01 | Link to Comment hooligan2009
hooligan2009's picture

money supply only matters in a closed economy, where it is spent/consumed/invested. The US is open, a better solution would have been to force all companies/employers to put their prices up and pay everyone a lot more money. another stupid idea, but just as valid as printing cash to hide losses. fact is the money tied up in non-performing loans is already no different from the creation of pretty paper. both worth double O triple O fuck all blank. the money has to be employed to make a return. when money cant be employed to make a return (ie reflect profits earned or wealth created) then it is useless. swapping one useless for another is just as useless. pretending that assets exist that produce income or wealth is corruption. free markets without intervention sort this out. regulators and the fed act as communist agents by not letting this sorting out process occur, hence you have boom (lots of corruption) and bust (emperors clothes) 

Tue, 03/02/2010 - 19:08 | Link to Comment Mark Beck
Mark Beck's picture

Interesting, however the premise is the FED is reporting a true representation based on what? Accounting practices (GAAP)? Which ones? How do they price their MBS holdings?

Also, in my opinion, the term liability does not apply to the FED. How much labor was exchanged for buying the MBS buy, only the amount of effort to record it, and much of this was jobbed out. No central banks must be viewed by their actions, plausibility of purpose through the destruction of wealth.

Think of it Trillions of USDs spent to influence real estate asset prices on a de-leveraging asset class. To lose this battle is epic failure. Hence the HAMP extension.

So the notion of applying risk to the FED is unrealistic. There is no price for them to pay, except the one of moral responsibility as Americans.

So the real concern is we do not know the impact of FED actions because they do not report it. Also the statement in the article as per hyperinflation, needs to be clarified.

At this point in time, we have Indeflationold; which is described as a mix of deflationary price pressures and de-leveraging, inflating monetary policy and a need for an asset of real worth, like gold, as a measuring yard stick to compare the fiat currencies against. The trick is to find something of constatnt value to compare against, gold is close, but not perfect. Oil is close but not perfect. So getting too precise is probably not a possibility, unless you have access to a lot of real time information, like the FED, and can produce an custom index. The important point is the economic and investing models rooted in the past, no longer apply to what we have today. I know this is a sweeping statement, but so are the (mis) actions taken by GOV/FED.

As far as FED balance sheet stuff here is a basic one from Khan:

http://www.youtube.com/watch?v=MILF-9GeMDQ

For the latest on the FED balance sheet go to:

http://federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm

Estimated currency in circulation is:

$932,489 Million

It is estimated because they can not track it that close in real time.

FHA:

http://portal.hud.gov/portal/page/portal/HUD/federal_housing_administration

Making home affordable:

http://makinghomeaffordable.gov/pr_11302009.html

Well we have the double edged sword of political lunacy manifesting itself in the meddlings of a private market, namely real estate. So the government wants to obligating you to an asset of falling worth. The only way to pull this off, by any plausible recourse for the bank, who understands the price is at a premium, both in terms of real worth and related to mean wages, by the FHA guarenteeing the loan in case of default. What? 

The real story is that, people should not pay for any over priced asset no matter where they get the money, and we see the extent of Governments desperation to prolong the debt de-leveraging cycle.

When you wrap it all together, there is a lot of effort to manipulate real estate prices up. The problem for the Government/FED is who takes the loss (Banks), if it is not refinanced (You).

Now I have to add the common local real estate market disclaimer to my comments with regards to price, but overall prices should continue to drop. I estimate another 20 to 25% from today, depending on actions of the TREAS/FED.

Mark Beck

Tue, 03/02/2010 - 19:23 | Link to Comment hooligan2009
hooligan2009's picture

I don't agree with the assertion that the Fed want to see wealth destruction for taxpayers. I agree that this is the result, and that the economics is flawed and out of date. The problem lies with an open economy and companies seeking to game the domestic systems in the US and overseas (with banks being the fastest moving, but by no means the only players) whilst at the same time applying tough employment (equality/health care/working conditions) domestically and then exporting capital to areas across the globe where these employment conditions don't exist. The Fed would rather be boring. Unfortunately, you ask a boring person to start putting out a wild fire, the results are predictable. MY point is that the model being adopted cannot work a) because it hasn't worked in Japan and b) because if it ever could work we would have spotted Nirvana a long time before. Solutions are analagous to the previous post of returning to barter, by putting this model out of its misery. It serves no useful social function; we can call it economic if we want. But economics is the prediction of possible outturns from historic relationships, the more the better. Human beings can act in predictable ways, but one of those ways is breaking the law if the law is an ass and you would otherwise be hurt (hunger or illness or abbreviated life). People know when they are living beyond their means and when they are poor and when they have cheated and when they have worked hard. The Fed doesn't, it has no moral compass. Hence we need a new model. In short, the Fed is doing what it is being paid to do. It has no morals, in the same way that money has no emotions. This agrees with your point of making the Fed accountable, but I have no wish to, for example, see a rapist being shown to be a rapist. I already know what rape is.

Tue, 03/02/2010 - 19:54 | Link to Comment Anonymous
Tue, 03/02/2010 - 22:36 | Link to Comment Anonymous
Tue, 03/02/2010 - 20:00 | Link to Comment Anonymous
Tue, 03/02/2010 - 21:44 | Link to Comment Anonymous
Wed, 03/03/2010 - 00:53 | Link to Comment Yori
Yori's picture

its been a while since my financial accounting classes but when they say:

When a bank makes a loan or purchases a security, it records the loan or security as its asset and creates deposit currency as its liability.  Simple bookkeeping entries increase the bank’s assets and liabilities by the same amount. 

does the fully-funded (i.e. no margin or leverage) purchase of a security actually increase the balance sheet or is it just a transfer on the asset side from cash to investment. it's only when leverage is involved that the balance sheet actually increases right?

so knowing that (if that is the case), isn't there a way to back out the actual "money" that has been created (because as you mention in the article, the fed is the only one that can actually 'monetize' new bills) by calculating the money multiplier or leverage ratio to deduce how much has been 'printed' versus how much is due to leverage. it is the printing that is worse than the multiplying and in the run-up to the crisis, banks did become a little more levered perhaps than in the past.

 


 


Wed, 03/03/2010 - 02:37 | Link to Comment halcyon
halcyon's picture

Silly scare-mongering from a gold-bug who doesn't understand (or plays as if he doesn't) central banking and money aggregates.

Why do you keep listening to these gold-pushers?

"Hey, I've got a car to sell!"

"All other cars in the world are prone to horrific explosions."

"Only my car is safe & the price is going up, Buy, buy, buy!"

You can't blame them for not trying - that's for sure :)

 

Wed, 03/03/2010 - 07:21 | Link to Comment Anonymous
Wed, 03/03/2010 - 10:42 | Link to Comment Anonymous
Fri, 04/16/2010 - 10:03 | Link to Comment Tom123456
Tom123456's picture

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