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The Fed Is Responsible for the Crash in the Money Multiplier ... And the Failure of the Economy to Recover
- Central Banks
- Credit Crisis
- default
- Dominique Strauss-Kahn
- European Central Bank
- Excess Reserves
- Federal Reserve
- Global Economy
- International Monetary Fund
- Kohn
- Lehman
- Lehman Brothers
- M1
- M3
- Market Crash
- Monetary Base
- Monetary Policy
- Money Supply
- New York Fed
- Open Market Operations
- Recession
- recovery
- World Bank
Greg Mankiw noted in January 2009:
Econ prof Bill Seyfried of Rollins College emails me:
Here's
an interesting fact that you may not have seen yet. The M1 money
multiplier just slipped below 1. So each $1 increase in reserves
(monetary base) results in the money supply increasing by $0.95 (OK, so
banks have substantially increased their holding of excess reserves
while the M1 money supply hasn't changed by much).
Since January 2009, the M1 Money Multiplier has crashed further, to .786 in the U.S. as of February 24, 2010:
(Click for full image; underlying data is here)
That means that - for every $1 increase in the monetary base - the money supply only increases by 79 cents.
Why is M1 crashing?
Because the banks continue to build up their excess reserves, instead of lending out money:
These excess reserves, of course, are deposited at the Fed:
Why are banks building up their excess reserves?
As the Fed notes:
The
Federal Reserve Banks pay interest on required reserve
balances--balances held at Reserve Banks to satisfy reserve
requirements--and on excess balances--balances held in excess of required reserve balances and contractual clearing balances.
The New York Fed itself said in a July 2009 staff report that the excess reserves are almost entirely due to Fed policy:
Since
September 2008, the quantity of reserves in the U.S. banking system has
grown dramatically, as shown in Figure 1.1 Prior to the onset of the
financial crisis, required reserves were about $40 billion and excess
reserves were roughly $1.5 billion. Excess reserves spiked to around $9
billion in August 2007, but then quickly returned to pre-crisis levels
and remained there until the middle of September 2008. Following the
collapse of Lehman Brothers, however, total reserves began to grow
rapidly, climbing above $900 billion by January 2009. As the figure
shows, almost all of the increase was in excess reserves. While
required reserves rose from $44 billion to $60 billion over this
period, this change was dwarfed by the large and unprecedented rise in
excess reserves.[Figure 1 is here]
Why
are banks holding so many excess reserves? What do the data in Figure 1
tell us about current economic conditions and about bank lending
behavior? Some observers claim that the large increase in excess
reserves implies that many of the policies introduced by the Federal
Reserve in response to the financial crisis have been ineffective.
Rather than promoting the flow of credit to firms and households, it is
argued, the data shown in Figure 1 indicate that the money lent to
banks and other intermediaries by the Federal Reserve since September
2008 is simply sitting idle in banks’ reserve accounts. Edlin and
Jaffee (2009), for example, identify the high level of excess reserves
as either the “problem” behind the continuing credit crunch or “if not
the problem, one heckuva symptom” (p.2). Commentators have asked why
banks are choosing to hold so many reserves instead of lending them
out, and some claim that inducing banks to lend their excess reserves
is crucial for resolving the credit crisis.This view has lead
to proposals aimed at discouraging banks from holding excess reserves,
such as placing a tax on excess reserves (Sumner, 2009) or setting a
cap on the amount of excess reserves each bank is allowed to hold
(Dasgupta, 2009). Mankiw (2009) discusses historical concerns about
people hoarding money during times of financial stress and mentions
proposals that were made to tax money holdings in order to encourage
lending. He relates these historical episodes to the current situation
by noting that “[w]ith banks now holding substantial excess reserves,
[this historical] concern about cash hoarding suddenly seems very
modern.”[In fact, however,] the total level of reserves in the
banking system is determined almost entirely by the actions of the
central bank and is not affected by private banks’ lending decisions.The
liquidity facilities introduced by the Federal Reserve in response to
the crisis have created a large quantity of reserves. While changes in
bank lending behavior may lead to small changes in the level of
required reserves, the vast majority of the newly-created reserves will
end up being held as excess reserves almost no matter how banks react.
In other words, the quantity of excess reserves depicted in Figure 1
reflects the size of the Federal Reserve’s policy initiatives, but says
little or nothing about their effects on bank lending or on the economy
more broadly.This conclusion may seem strange, at first glance, to readers familiar with textbook presentations of the money multiplier.
Why Is The Fed Locking Up Excess Reserves?
Why is the Fed locking up excess reserves?
As Fed Vice Chairman Donald Kohn said in a speech on April 18, 2009:
We
are paying interest on excess reserves, which we can use to help
provide a floor for the federal funds rate, as it does for other
central banks, even if declines in lending or open market operations
are not sufficient to bring reserves down to the desired level.
Kohn said in a speech on January 3, 2010:
Because
we can now pay interest on excess reserves, we can raise short-term
interest rates even with an extraordinarily large volume of reserves in
the banking system. Increasing the rate we offer to banks on deposits
at the Federal Reserve will put upward pressure on all short-term
interest rates.
As the Minneapolis Fed's research consultant, V. V. Chari, wrote this month:
Currently,
U.S. banks hold more than $1.1 trillion of reserves with the Federal
Reserve System. To restrict excessive flow of reserves back into the
economy, the Fed could increase the interest rate it pays on these
reserves. Doing so would not only discourage banks from draining their
reserve holdings, but would also exert upward pressure on broader
market interest rates, since only rates higher than the overnight
reserve rate would attract bank funds. In addition, paying interest on
reserves is supported by economic theory as a means of reducing
monetary inefficiencies, a concept referred to as “the Friedman rule.”
And the conclusion to the above-linked New York Fed article states:
We
also discussed the importance of paying interest on reserves when the
level of excess reserves is unusually high, as the Federal Reserve
began to do in October 2008. Paying interest on reserves allows a
central bank to maintain its influence over market interest rates
independent of the quantity of reserves created by its liquidity
facilities. The central bank can then let the size of these facilities
be determined by conditions in the financial sector, while setting its
target for the short-term interest rate based on macroeconomic
conditions. This ability to separate monetary policy from the quantity
of bank reserves is particularly important during the recovery from a
financial crisis. If inflationary pressures begin to appear while the
liquidity facilities are still in use, the central bank can use its
interest-on-reserves policy to raise interest rates without necessarily
removing all of the reserves created by the facilities.
As the NY Fed explains in more detail:
The
central bank paid interest on reserves to prevent the increase in
reserves from driving market interest rates below the level it deemed
appropriate given macroeconomic conditions. In such a situation, the
absence of a money-multiplier effect should be neither surprising nor
troubling.Is the large quantity of reserves inflationary?
Some
observers have expressed concern that the large quantity of reserves
will lead to an increase in the inflation rate unless the Federal
Reserve acts to remove them quickly once the economy begins to recover.
Meltzer (2009), for example, worries that “the enormous increase in
bank reserves — caused by the Fed’s purchases of bonds and mortgages —
will surely bring on severe inflation if allowed to remain.” Feldstein
(2009) expresses similar concern that “when the economy begins to
recover, these reserves can be converted into new loans and faster
money growth” that will eventually prove inflationary. Under a
traditional operational framework, where the central bank influences
interest rates and the level of economic activity by changing the
quantity of reserves, this concern would be well justified. Now that
the Federal Reserve is paying interest on reserves, however, matters
are different.When the economy begins to recover, firms will
have more profitable opportunities to invest, increasing their demands
for bank loans. Consequently, banks will be presented with more lending
opportunities that are profitable at the current level of interest
rates. As banks lend more, new deposits will be created and the general
level of economic activity will increase. Left unchecked, this growth
in lending and economic activity may generate inflationary pressures.
Under
a traditional operating framework, where no interest is paid on
reserves, the central bank must remove nearly all of the excess
reserves from the banking system in order to arrest this process. Only
by removing these excess reserves can the central bank limit banks’
willingness to lend to firms and households and cause short-term
interest rates to rise.Paying interest on reserves breaks this
link between the quantity of reserves and banks’ willingness to lend.
By raising the interest rate paid on reserves, the central bank can
increase market interest rates and slow the growth of bank lending and
economic activity without changing the quantity of reserves. In other
words, paying interest on reserves allows the central bank to follow a
path for short-term interest rates that is independent of the level of
reserves. By choosing this path appropriately, the central bank can
guard against inflationary pressures even if financial conditions lead
it to maintain a high level of excess reserves.This logic
applies equally well when financial conditions are normal. A central
bank may choose to maintain a high level of reserve balances in normal
times because doing so offers some important advantages, particularly
regarding the operation of the payments system. For example, when banks
hold more reserves they tend to rely less on daylight credit from the
central bank for payments purposes. They also tend to send payments
earlier in the day, on average, which reduces the likelihood of a
significant operational disruption or of gridlock in the payments
system. To capture these benefits, a central bank may choose to create
a high level of reserves as a part of its normal operations, again
using the interest rate it pays on reserves to influence market
interest rates.
Because financial conditions are not
"normal", it appears that preventing inflation seems to be the Fed's
overriding purpose in creating conditions ensuring high levels of
excess reserves.
The Fed Has Failed Once Again
I believe that the Fed's efforts to ensure excess reserves are
completely wrong, as deflation is the greater short-term threat. See this, this, this, this, this, this, this, this and this.
However,
regardless of whether or not the Fed has been right to worry about
inflation since it started paying interest on excess reserves in
October 2008, the real cost of it's program to the American people and the American
economy has been staggering.
In October 2009:
Otmar Issing, the ECB's former chief economist, told an Open Europe forum in
London that policymakers are entering treacherous waters. "Nobody can
be sure that we have a self-sustaining recovery. The challenges facing the
ECB are tremendous," he said.
"Money multipliers have collapsed everywhere. What M3 is telling us is
that confidence is missing. I don't see any way to stabilise M3 in such
circumstances," he said.
Barron's notes:
The
multiplier's decline "corresponds so exactly to the expansion of the
Fed's balance sheet," says Constance Hunter, economist at hedge-fund
firm Galtere. "It hits at the core of the problem in a credit crisis.
Until [the multiplier] expands, we can't get sustainable growth of
credit, jobs, consumption, housing. When the multiplier starts to go
back up toward 1.8, then we know the psychological logjam has begun to
break."
As I wrote last October:
Professor Tim Congdon from International Monetary Research says:
A
key reason for credit contraction is pressure on banks to raise their
capital ratios... "The current drive to make banks less leveraged and
safer is having the perverse consequence of destroying money balances,"
he said. "It strengthens the deflationary forces in the world economy.
That increases the risks of a double-dip recession in 2010."But isn't it good that governments are requiring banks to raise their capital rations?
Sure,
but unless they force the banks to write off their bad debts, they will
remain giant black holes, and will never be adequately capitalized. If
they are never adequately capitalized, they will never release money
out into the economy through loans and other economic activity ...As just one example, remember that the nominative amount of outsanding derivatives dwarfs
the size of the global economy. As another example, remember that
several of the too big to fails have close to a trillion dollars each in toxic assets in off-book SIVs.IMF chief Dominique Strauss-Kahn says
that the history of financial crises shows that "speedy recovery"
depends on "cleansing banks' balance sheets of toxic assets". "The
message of all financial crises is that policy-makers' priority must be
to stop the quantity of money falling and, ideally, to get it rising
again," he said.As many people have repeatedly written (including me),
the world's governments must restore sound economic fundamentals -
which includes forcing banks to write down their bad assets - instead
of cranking up the printing presses and trying to paper over all of the
problems.Moreover, as [we]
have pointed out, governments can create all the credit they want, but
if people do not have jobs, they will not borrow that money.In addition, the amount of credit and wealth destroyed exceeds the amount of money pumped into the system.
When
will the politicians listen? Will they wait until after the next huge
market crash? When there are tent cities everywhere? After their
governments default and they essentially lose sovereignty under
"austerity measures" imposed by the IMF, World Bank or other agency?
Note 1: The NY Fed actually says that
the M1 money multiplier is now moot as a metric. Specifically, the
above-discussed paper states that the central bank's policy of paying
interest on excess reserves renders the M1 money multiplier - that all
economists rely on - useless.
Note 2: It's not just the Fed. The NY Fed report notes:
Most central banks now pay interest on reserves.
Note 3: I understand that consumers' balance sheets are so impaired that many are not looking for loans. However, many consumers and small businesses are looking for credit, and are being turned down.
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It's tough to have deflation when the people who are in charge of the money have the ability to print money. So when it tries to impode and deflate they simply print to cover and then BOOM. Everbodies screwed. Except the gold holders.
Correct me if I am wrong - the last time the banks held "real money" as reserves was sometime in early 2008. Since about June of 2008, all reserves have been created by the Fed and borrowed by the banks (at zero + .0001%), then redeposited at the fed and earning interest, thus a form of arbitrage only. These are not real funds, they are not earned reserves - it is a great big pile of printed notes, earning interest (itself another big pile of printed notes). A closed, masturbatory system.
Fed hold rates low for the foreseeable future ... how do they justify this when in the same breath they claim happy times are here again ... Hope, Hope, Hope
The only way I know how to spell it is with gold, guns, water system, food and personal care supply, with geographic flexibility, which includes a current passport and a willingness to leave in a moments notice, kinda like the guy in Heat, but for different reasons!
WHEN, when they say you can (you have to read between the lines because
they wont actually say it) in the meantime go long, the trend is your friend.
But when, can I short the S&P (and not be stopped)? All this talk of deflation begs the question of WHEN.
When they have rounded up all the bears and put them in a
detention center and outlawed shorting stocks, that will be
the time.
There are long-term bears, like most people that are aware the system is crashing, and the short-term bears that continue to manipulate the system to produce conditions that make shorting insanely profitable.
And I mean insane.
Wow ... should I tell Mama Bear
or when to buy TZA (3x leveraged short, small-cap ETF)?
I am buying at 7.16 and 7.06
You should be buying at 5.56 and 7.62
Okay folks. Enough of the doom. Its NOT that bad.
So maybe there's no "Federal Reserve" and the "retirement assets" accumulated by the "Baby Boom Generation" get wiped out. So what ??
The USA is resilient and, in time, will recover. I look forward to the day when the "accounting fraud generation" is take off the field and the slate is wiped clean for a new generation to take over.
The bankers and political leaders hatched in the 60s 70s 80s and 90s are morally and intellectually bankrupt. They confuse economic progress with accounting fraud. The believe fiat money has a long term future ... even if that future must be enforced with corruption and brutality.
There is a bright future beyond fractional reserve banking. Once the corrupt web of lies, deceit, rents, taxation, fraud, wastefulness, political corruption, stupidity, and ardent belief in perpetual motion machines and antigravity devices disappears, society can recover.
If you think you're "rich" because you "own" a lot of "financial assets" and you live in a bit city on the coast and don't have a lot of friends or farming acumen or gold and silver or stored fuel ... I would seriously recommend a change of venue.
As I understand it, according to the conclusion of the NY Fed statement cited, paying interest on reserves allows them to more freely manipulate short-term interest rates, without the worry of draining excess reserves creating looming inflation...
So the process has been one of papering over banks' losses through "liquidity facilities", instead of writing them off?
The Fed desperately wishes to keep rates low and it appears they can now do this ad infinitum. But, in the absence of increased lending, can the economy ever recover enough to end this tactic?
Question is: which comes first - increased lending or increased REAL economic growth? I still think lending-fueled economic growth is unlikely to be REAL...
Purhaps the banks are holding on to reserves because they anticipate more writedowns in the coming months and year. Just saying. The keynesians think that their precious multipliers are essential to the economy, but they often fail to see the real world specifics of individual action. And I know mancow is a Keynesian in sheep's clothing Chicago school tool.
The prudent thing to do would be to hold on to greater reserves if you anticipate greater loses. A shock, I know
Maybe, but:
(1) As the NY Fed report makes clear, it is the FED, not the banks, that drive this; and
(2) This INCREASES deflationary forces.
If your only goal is survival of your too big to fail buddies, might be a good strategy. If your goal is to help the american people and the american economy, then - IMHO - the Fed should BUTT OUT.
The fed is the banks, esp the nyfrb. But. Without getting into that and working on things that I think you can write about... The fed will use interest rates paid on reserves as the new benchmark rate. The federal reserve funds rate is dead. Why do banks need to loan to each other when they're being paid interest on "excess" reserves at the fed. Fed governors have suggested as much. I want to say kohn like 6 months ago in a speech. Keep digging, gw. Love the writing
Thanks, Catullus. I've got a huge Austrian streak too ...
George:
You and I agree on so many things. I have written extensively on this problem as well. What the critics miss is that there is nothing "excess" about these reserves. Until banks come to grips with the bad debt on their balance sheets, they'll keep reserves high to offset potential losses. Thus reserves are being economically used to hedge against losses and there's nothing excess about them.
Good piece.
Agree, it's a good piece and the excess may be a shortage.
Austrian daps.
The last thing you want is these banks lending out their reserves - what do the customers typically buy with this money - a new car when the old one will do , a holiday , upgrade the kitchen maybe.
The lesson we need to learn is that our banks are dysfunctional. Increasing consumption does not increase industrial capacity just the debt ratio.
The philosophy of monetarism has destroyed the willingness and ability of governments to spend large amounts of money on utilities necessary to increase productive capacity.
I consider myself a republican (European Gaullist type) and I do not understand the so called republicans aversion to governments undertaking these projects.
The main argument seems that governments are bureaucratic and are incapable and wasteful. Well I have some news for you brave republicans out there - banks are bureaucratic, corporations are bureaucratic - every large organisation on the planet is bureaucratic. Monetarism has failed spectacularly - it does not work because most of the debt creation gets converted into assets that do not create a income.
Let the banks buy and hold goverment debt - this will raise their capital ratios (wipe out shareholders and give bond holders equity)
Inflation in the next decade is baked in the cake because of the recent failed monetarist experiment - our only hope is to increase industrial capacity through massive fiscal investment and maybe the wages and dividends can somehow keep pace with inflation.The Western world has been blinded by central banks inflation reports for too long - even if they were correct in their consumer inflation numbers , the deflation in wages have been real - they are essentially the same thing.
Hail mary, full of grace, the FED is with thee........world without end, word.
1930 a 1000 bucks bought a basket of stuff
today 70,000 buys same basket
hyper infLATION A monetery event ... doesnt matter the debt ,, as the fiat falls to 50 ,, stuff we need go up in price ,,,
house , credit cards , government debt,, monetize the chickens come home to poop..
get some gold
most thieves interfere with "the economic recovery" of their victims
The Fed will expand until it finally implodes and becomes a black hole, a singularity and sucks up everything.
If you follow the true CPI, we haven't had 2 consecutive quarters of actual honest to God deflation since 1954, we did have a month or two last year, but... whew!, Bernanke took care of that right quick didn't he. When we have a printing press, deflation is a red herring, or at least a salmon.
GW, great work. I hope the ZH economy minded folks keep popping up these FED charts. They are invaluable to showing the true state of things. Thanks.
Things are going to slide, slide in all directions
Won't be nothing
Nothing you can measure anymore
The Future
Leonard Cohen
Problem-Reaction-Solution...essentially from "The
Prince" by Nicolo Machiavelli. Those in power create
the problem, then the public reacts...oh please help
us...then the same "authorities" that created the problem
(unknown, of course, to most of the masses) provide
the solution. "Authorities"...such an oxy'moron'..it
never ends...
The Hegelian Dialectic. The master way to control the cattle while leaving them to believe that they're in control of themselves.
Its called Munchausens at work Happy Days
Its how the federal employee system works
(I know, I am a federal emp, see this all the time, and BTW, we are watching you Happy Days!)
And with the media machine juggernaut........The spin is an endless barrage of mind-numbing propaganda.
+ 1,000
5 Stages of Contemporary American Grief
1) Denial
2) Denial
3) Denial
4) Oh no they didn't!
5) Acceptance
You almost had it perfect.
+10
It just shows the extent of damage on bank balance sheets. And they said they were going to fix this shit in 1 year! HAH!
Enjoy the ride people, it's going to be interesting.
Are we surprised. Timmeh and Ben sat on their hands while Lehman was insolvent for 6 months and they knew it, in the hopes they'd raise enough capital to save themselves.
Those two guys, are still running the show.
And E&Y will take the ass pounding.
This is nothing a 60" LCD permanently tuned to a rotation of CNBC/CNN/ABC/FOX etc and tooth picks under the eye lids can't fix. Perception is reality. We have crossed over the Rubicon into the Twilight Zone. Pull up any economic chart and it's clear we're in uncharted (pun intended) territory. It matters not an iota what we think should be happening. As long as the plebs don't wish to accept the ugly truth, the ugly truth can be held at bay for another day. Until it can't.
Since the avg human lifespan is only around 72 years, this statement is true with regards to inferring the personal 'we' as in you & I. However, as a civilized people dating back 10k years or so, this path has been so repeatedly (re)traveled that one would think it was practically impassable due to the resulting erosion.
Here's the simplest trick I know of explaining exponential math to those who don't understand what is occurring ie those who don't work in banking and/or cruise the interweb financial sites:
You have a real asset, like land. I have a piece of paper that states, using your land as collateral, I have lent you 100 talents @ 1.5% interest over the rate of inflation. (BTW, I didn't even really lend you any "money" ie gold, I merely printed some fraudulent tickets that say "Talents".)
Question: how long does it take for the loan to double in value if the interest is rolled over each year into a new principle balance? Answer: around 50 years.
If the paper note is unpayable, which by definition it is since credit is always created/loaned at a rate exceeding price inflation (ie the rise in value of the real underlying asset), then I get to foreclose and take the land you pledged as collateral.
The process works the same exact way every damn time without exception. The only time the technique fails is when the legal basis covering contract law is abrogated. We've seen it just recently occur in Iceland, but this mechanism is by no means the first.
When Edward I (Longshanks) returned from the Crusades in 1274, he discovered that practically the entire country of England was dispossessed and now in the hands of money-lenders. His solution: creditors were no longer liable for certain debts.
But wait, it wasn't just some Anglos ragin' on a minority group. For in point of fact, around 5,000 years ago the same minority group itself pioneered the concept of jubilee (debt forgiveness), which, get this, occur ed at ... 50 years. Poetic, no? Or just math?
We are soon nearing the default stage, whether it is actual non-payment and/or inflation. Next will be repudiation - the Chinese have already shown the way, so now it is our turn to return the favor. Back and forth it will go all over the globe - the final reset.
Once everyone is sufficiently pissed-off at everyone else, then the war(s) begin. Sh!t, I should write history books before the events have even transpired.
B9K9
Very smart post. Better than the article.
Abrogation / repudiation of the debt is vastly more acceptable than allowing the Bankster Oligarchy to buy all the failed businesses and real-estate out of receivership for pennies on the dollar.
There will be a reckoning
http://www.takeitbackday.org/
+1
As usual. Kudos to both of you.
Always wondered who Edward was while watching Braveheart.
Inflation and rising rates triggers worldwide sovereign defaults as incomes and tax receipts remain depressed. No one wants that scenario. The question is how can it be avoided, and what metods will be used.
Only way out, and really it is too late, is to cut .gov spending. Like that will happen soon.
The beast may try to squeeze blood from a stone but eventually, the beast will die.
Chinese Prozac.
No shit!
You say "cut government spending" and the eyes roll back in their heads and they start to convulse.
Then the next thing you know, you are on the anti-American, no-fly, enemy combatant lists!!
"It hits the core of the problem in a credit crisis. Until (the multiplier) expands, we can't get sustainable growth of credit, jobs, consumption, housing."
What an idiot! This concept would make a person think that there are no boundaries to credit creation. That it is just a matter of getting people off their butts to go out and borrow more and spend more. There is a real disconnect between the reality of servicing existing debt and the creation of even more.
Somewhere in their pea brain must be this notion that servicing debt just means borrowing even more to service the existing debt with. Never an idea of actually owing anything. It is all about leverage and momentum and the idea of growth is only a concept of growth in credit, of which they always get a servicing fee for both the set up and the collection. Everything is always about them.
If this concept of expanding credit forever actually worked for people other than those who have the connections to benefit from this scam, then nobody would need to work. All we have to do is borrow more and more, spend and travel and enjoy the fruits of debt, then when we get old, we borrow some more and leave it to our children and their children to spend. While we eliminate all taxes at the same time. Let the Chinese pay for our insatiable appetite. After all we service the world, let them do our work for us. They make, we buy… Works good as long as the credit continues to flow… Oops!
What a bunch of arrogant hedonistic idiots we have in charge of our monetary system.
But then again, why work when you can just enjoy the fruits of someone else’s labors while gaming the system for your own insatiable pleasure and/or greed?
Not because it is a road to ruin for the system. Not because it is immoral to enslave others. Not because it causes major damage to the environment. Not because it reduces the real quality of our educational system or health care system. But because they can. They deserve to. They are special or god wouldn’t have… oh now it is god’s work too.
Now they have been reduced IMHO from idiots to Ahs and thugs.
But that's what our system is based on, ever expanding credit.