Guest Post: The Loan: An Exchange Of Wealth For Income
Submitted by Keith Warner
The Loan: An Exchange Of Wealth For Income
As the title of this essay suggests, a loan is an exchange of wealth for income. Like everything else in a free market (imagine happier days of yore), it is a voluntary trade. Contrary to the endemic language of victimization, both parties regard themselves as gaining thereby, or else they would not enter into the transaction.
In a loan, one party is the borrower and the other is the lender. Mechanically, it is very simple. The lender gives the borrower money and the borrower agrees to pay interest on the outstanding balance and to repay the principle.
As with many principles in economics, one can shed light on a trade by looking back in history to a time before the trade existed and considering how the trade developed.
It is part of the nature of being a human that one is born unable to work, living on the surplus produced by one’s parents. One grows up and then one can work for a time. And then one becomes old and infirm, living but not able to work. If one wishes not to starve to death in old age, one can have lots of children and hope that they will care for their parents in their old age. Or, one can produce more than one consumes and hoard the difference.
One discovers that certain goods are better for hoarding than others. Beyond a little food for the next winter season, one cannot hoard very much. One of the uses of the monetary commodity is to carry value over time. So one uses a part of one’s weekly income to buy, for example, silver. And over the years, one accumulates a pile of silver. Then, when one is no longer able to work, one can sell the silver a little at a time to buy food, clothing, fuel, etc.
Like direct barter trade, this is inefficient. And there is the risk of outliving one’s hoard. So at some point, a long time ago, they discovered lending. Lending makes possible the concept of saving, as distinct from hoarding. It is as significant a change as when people discovered money and solved the problem of “coincidence of wants”. This is for the same reason: direct exchange is replaced by indirect exchange and thereby made much more efficient.
With this new innovation, one can lend one’s silver hoard in old age and get an income from the interest payments. One can budget to live on the interest, with no risk of running out of money. That is, one can exchange one’s wealth for income.
If there is a lender, there must also be a borrower or there is no trade. Who is the borrower? He is typically someone young, who has an income and an opportunity to grow his income. But the opportunity—for example, to build his own shop—requires capital that he does not have and does not want to spend half his working years accumulating. The trade is therefore mutually beneficial. Neither is “exploiting” the other, and neither is a victim. Both gain from the deal, or else they would not agree to it. The lender needs the income and the borrower needs the wealth. They agree on an interest rate, a term, and an amortization schedule and the deal is consummated.
I want to emphasize that we are still contemplating the world long before the advent of the bank. There is still the problem of “coincidence of wants” with regard to lending; the old man with the hoard must somehow come across the young man with the income and the opportunity. The young man must have a need for an amount equal to what the old man wants to lend (or an amount much smaller so that the old man can lend the remainder to another young man). The old man cannot diversify easily, and therefore his credit risk is unduly concentrated in the one young man’s business. And bid-ask spreads on interest rates are very wide, and thus whichever party needs the other more urgently (typically the borrower) is at a large disadvantage.
Of course the very next innovation that they discovered is that one need not hoard silver one’s whole career and offer to lend it only when one retires. One can lend even while one is working to earn interest and let it compound. This innovation lead to the creation of banks.
But before we get to the bank, I want to drill a little more deeply into the structure of money and credit that develops.
Before the loan, we had only money (i.e. specie). After the loan, we have a more complex structure. The lender has a paper asset; he is the creditor of the young man and his business who must pay him specie in the future. But the lender does not have the money any more. The borrower has the money, but only temporarily. He will typically spend the money. In our example, he will hire the various laborers to clear a plot of land, build a building and he will buy tools and inventory.
What will those laborers and vendors do with the money? Likely they will keep some of it, spend some of it… and lend some of it. That’s right. The proceeds that come from what began as a loan from someone’s hoard have been disbursed into the economy and eventually land in the hands of someone who lends them again! The “same” money is being lent again!
And what will the next borrower do with it? Spend it. And what will those who earn it do? Spend some, keep some, and lend some. Again.
There is an expansion of credit! There is no particular limit to how far it can expand. In fact, it will develop iteratively into the same topology (mathematical structure) as one observes with fractional reserve banking under a proper, unadulterated gold standard!
Without banks, there are two concepts that are not applicable yet. First is “reserve ratio”. Each person is free to lend up to 100% of his money if he wishes, though most people would not do that in most circumstances.
And second is duration mismatch. Since each lender is lending his own money, by definition and by nature he is lending it for precisely as long as he means to. And if he makes a mistake, only he will bear the consequences. If one lends for 10 years duration, and a year later one realizes that one needs the money, one must go to the market to try to find someone who will buy the loan. And then discover the other side of that large bid-ask spread, as one may take a loss doing this.
Now, let’s fast forward to the advent of the investment bank. Like everyone else in the free market, the bank must do something to add value or else it will not find willing trading partners. What does the bank do?
As I hinted above, the bank is the market maker. The market maker narrows the bid-ask spread, which benefits everyone. The bank does this by standardizing loans into bonds, and the bank stands ready to buy or sell such bonds. The bank also aggregates bonds across multiple lenders and across multiple borrowers. This solves the problem of excessive credit risk concentration, coincidence of wants (i.e. size matching), and saves both lenders and borrowers enormous amounts of time. And of course if either needs to get out of a deal when circumstances change, the bank makes a liquid market.
The bank must be careful to protect its own solvency in case of credit risk greater than it assumed. This is the reason for keeping some of its capital in reserve! If the bank lent 100% of its funds, then it would be bankrupt if any loan ever defaulted.
What the bank must not do, what it has no right to do, is lend its depositors’ funds for longer than they expressly intended. If a depositor wants to lend for 5 years, it is not the right of the bank to lend that depositor’s money for 10! The bank has no right to declare, “well, we have a reserve ratio greater than our estimated credit risk and therefore we are safe to borrow short from our depositors to lend long”
Not only has the bank no way to know what reserve ratio will be proof against a run on the bank, but it is inevitable that a run will occur. This is because the depositors think they will be getting their money back, but the bank is concealing the fact that they won’t behind an opaque balance sheet and a large operation. So, sooner or later, depositors need their money for something and the bank cannot honor its obligations. So the bank must sell bonds in quantity. If other banks are in the same situation, the bond market suddenly goes “no bid”.
The bank has no legal right and no moral right to lend a demand deposit or to lend a time deposit for one day longer than its duration. And even then, the bank has no mathematical expectation that it can get away with it forever.
Like every other actor in the market (and more broadly, in civilization) the bank adds enormous value to everyone it transacts with, provided it acts honestly. If a bank chooses to act dishonestly (or there is a central bank that centrally plans money, credit, interest, and discount and forces all banks to play dirty) then it can destroy value rather than creating it.
Unfortunately, in 2012 the world is in this sorry state. It is not the nature of banks or banking per se, it is not the nature of borrowing and lending per se, it is not the nature of fractional reserves per se. It is duration mismatch, central planning, counterfeit credit, buyers of last/only resort, falling interest rates, and a lack of any extinguisher of debt that are the causes of our monetary ills.
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so the situation is - gasp - NOT sustainable?
Loan me another $3 Trillion and I promise you this time I will drive America over the edge of the cliff! Obama 2013!!
The oldest adage fits best, Neither a Borrower nor a lender be. Having been on both sides of that equation, biggish time, IT'S TRUE!
The biggest problem I see with run-away debt, like now, is that it gives people an un-earned sense of entitlement.
And zero sense of ownership. That is why garages and attics around the world are filled with Billions and billions of dollars worth of "Goods", rotting.
Productive enterprise, dying at the hands of an un-earned sense of entitlement and a lack of true "ownership", both fed by un-deserved debt.
ori
watershed-day
Ori, concerning birth of capitalism and the debt racket inevitably ratcheted up in such societies : I don't care what anybody says, if you invent new ways of doing things through R&D and prototyping and market researching and market testing, the capitalistic process needs borrowing to create future wealth. So capitalism by its very nature says : today's lending/investment will pay back big tomorrow thanks to labour invested in capitalistic venture. This process cannot be truly driven by retained earnings ALONE to kick start it in precapitalistic countries. It needs capital injection AND lending. Zero lending and zero borrowing means capitalism is fighting with one arm tied to back. The whole historical time line from middle ages and Venice's birth and Columbus's voyage, proves that. Kings borrowed, as they didn't have money to pay these trail blazing adventurers who would recreate the world, like Marco Polo et al.
What happened before capitalism was invented, as mercantile trade did exist? Yes, in Caesar's days it was ALL fueled on slave labour of conquered nations, enrolled in the legions.
So capitalism is another way of using labor by proxy to achieve society's ends with fractional reserve lending as additional lever. Its more elegant than slave labour civilizations. But today excessive and ponzi leverage has created over capacity and unsustainable growth to pay off debt accumulated in asymmetrical fashion amongst disparate nations, regions.
Bottom line: to avoid empires and slave societies that it entails, Caesar's world; we need trade, capitalism and innovation to continue in an evolving paradigm change environment, as our material resource rainbow "changes colour". But we need to harness it better by going back to commodity based monetary systems, not pure fiat as since 1971. Also, we need to protect certain basic human rights, and ecological markers, as man, his ecosystem, stay center piece to human civilization. No return to slave labour. Apart from that we all need to watch our food diets and drink moderatly the good wine. As, our body is our true temple in temporal world, of which the jewel stays our mindset (Here I make a big concession to wisdom by foregoing my basic instinct in pecking order list!). Prost!
:-) I hear you Falak. Well said too.
My own struggle with Capital vs. "other" and "clear" beginnings is in the link below my post.
Staying true in a liar's world is tough. Really really tough.
ori
Ori, I read your blog spot. Its amazing in its originality. Can I make one suggestion?
As you make so many acute but difficult to grasp axioms of fundamental, tangential truths, it would be nice if we got a practical example of its application to a simple human eco system construct of your choice. Consider a village in India, make an ecosystem business cum process model of it and then apply your original idea theories to it; to go from current fuck-up to a better situation where you address all issues human and technological that make this possible.
WALK US THROUGH IT ORI, SO THAT WE CAN LEARN FROM YOU IN A SIMPLE WAY THAT EVERY ONE CAN UNDERSTAND OF YOUR NOVEL TANGENTIAL APPROACH.
You know that Occam's razor law applies to all of us : If its good its simple to understand by all! So show us a simple construct defining where you want to go, where we are currently and what it takes to get there; in your model of a small, typical, crazy, real world village or urban situation. God alone knows that bureaucracy has found as many routes man can think of to fukk it up good in current construct; from tribal caste system to Mercedes 4Litre cars on mud roads!
Thanks for listening to me.
Thanks Falak and what you are sayign is the very intention. It is on-going, just not revealed yet. Consider what I've written the pre-IPO phase! :-)
ori
+1 on that.
of course there's degrees of slavery. I for one recognize I'm a debt slave.
this is miles away from being chained to a trireme for life. that's progress.
Many people are chained to a cubicle and would otherwise have no clothing or shelter, nothing to eat, little physical security and little freedom of movement.
They do not know opf any other choice, if one exists at all for them.
"miles away from being chained to a trireme for life"
I guess you weren't copied on those initial DHS memos.
So it is black and white? Caesar or Capitalism?
I'm often amazed by the amount of rationalization one is capable of when defending an improbable position.
Hehe, mee too. Very well put. You clearly have a lot more self control than I do. I should learn from you.
we are talking of ends and means; based on historical analysis of western civilization. Can you give one instance when a stable society was achieved in PRE Capitalist times which did NOT require "gunpowder" or Caesarian empires and slave or serf labour?
Give me ONE example.
Now, since the capitalist age began in or around 1815, under Congress of Vienna imperial construct upto WWI, and AFTER Euro Armageddon of WWI & WW2 that saw it all dissolve in bickering; in the ruins of Auschwitz, we had an FDR administration proposing multilateral world organisations to foster peace and progress; with the winners (USA, USSR, GB, FR, later China) as primus inter pares. This construct, imperfect and often impotent, is still with us today and has saved the first world from new Armageddon. But to build peace we are still in capitalist construct since that industrial age began to ensure material progress through free trade (or sort of). Today's crisis does not necessarily mean capitalism is wrong. It shows that the current US NWO/Reaganonmics model is a ponzi, as its skewed and debt inflated. But it does not say capitalism is dead. That's my argument about ENDS and MEANS. I don't see it being contradicted by facts. We still try and achieve peaceful growth without Armageddon by using a more balanced, productive, hopefully evolutive capital forming model.
What "improbable position" are you referring to?
Stable? On what time scale?
the time to say eureka and make a catapult...then lose your head to some roman soldier when you defend home town syracuse...all in one life's span, where Carthage sang "fukk you very very much, we'll come get you" to Rome, and you ended up as collateral of that poison ivy league game. Hows that for 'lets crack this together or it'll frack us into burn out'?
Yeah, well - O.K.
Thanks, I guess.
Syracuse, on Sicilian island of magical Circe, a proud secluded pearl for three centuries, you stood off Alcibiade's perverted play, while Athens sunk to Sparta's revenge; but a century and half later you fell in the great game of Mare Nostrum, and Rome emerged, alone. From that day, Sicily became fair game. An island paradise it lost and found its soul repeatedly like a wanton senorita over two thousand years. But they still make a good wine on Mount Caputo's slopes, where lies magical Monreale, looking down on to the golden beach of Conca d'Oro; now, alas, overbuilt. Have a good smoke on that. Oublier Palerme, after the unique chapel, drink the wine, eat the Caponata, and have good mountain vitello alla marsala.
All that for a price of pizza in some hot-shot town uber-restaurants of Rome or Paris. You owe me one.
Does the term "Purple Prose" mean anything to you?
no lol, but I get the flowery picture...)))
I bow to your succint use of words.
I don't look backward, I look forward. News flash- capitalism died in WWII, it has been Kensien monkey fucking ever since.
Captialism is currently failing because there needs to be innefficiences build in to create living wage jobs, these innefficeinies take the form of socialism (in all forms, from corporate to wellfare to fascism.) For example, the mountian of money Apple is sitting on is proof that labor does NOT need to be extremely exploited for a company to survive and thrive, just one example of excessive greed fucking up the system. We would be better off if those profits were dealt out in higher wages to local wage slaves who earned more but also kept that money circulating in the econemy.
People woud rather build ipods than sit at home and collect the dole, but they have no choice because those are build in China where labor is cheaper.
Lets take this to the extreme, to a future where all labor is done by robots that last forever and are cheap to maintain, usually by other robots. Where will the jobs be? We don't even have to slide the pointer up the efficiency scale to see the effects.
This is what you don't understand: The Luddites are basically right. So how do you deal with a super efficient production? Genocide?
You engage people in the thing they are most suited for, Thinking. You don't try to make them into robots, you allow them to become fully as creative as they can be, and you see the progress in ideas / life that entails. Capitalism is dead, it's just that a lot of people are holding onto it as if it's the only way to live. As soon as the industrial revolution started, that was the end of labor by people... labor, not action, just labor. People need to engage in actions, satisfying to themselves, helpful to society, advantageous to humanity. What economy is needed when you can automate / produce relative surplus? You don't need to hold civilization back becuase people would just fuck all day... maybe that's what the ideal world is.... instead, work on educating people about responsible child birth... but this is a huge cultural shift that all needs to take place in order for this to even make sense.
Just fishing for Falek's opinion. I'm very torn on this myself.
I'm not an economist so i don't belong to any chapel. I am 'an after the fact analyser', basing my judgement, subjective and amateur, I insist on this with emphasis, on past analogies and current projections. The fact that Keynesian model built the demand side, state promoted, debt induced, welfare state oriented is incontestable. It may have gone too far; what good the Marshall plan achieved to prime Euro reconstruct, which resulted in Euro 30 year miracle as Euro money then kicked in massively behind Marshall Plan euphoria, starting the Euro post war reconstruct and fueling the 30 year golden age of USA 50/60s export economy dominating world, where they had trade surpluses, was just a passing phase. It all started to end post Nov 23 1963 when the US model changed into govt. overspend (Great society,Vietnam war, + US oil peak and subsequent imports bill).That led to 'exorbitant privilege' and 1971 BW revoke by RN. Now the economy was in trade deficit.
So my whole debate focusses on Ends and Means. The Keynesian trend went over board, not because it was bad but because it was abused by LBJ. There are NO absolutes in economics, inexact science, as humanly interactive and reactive, so its all a question of balance. The Friedmanien knee jerk and the Thatcher-Reagan ideology proposed a solution that was worse than the problem. It created a pandora's box of "greed is good" mindset. We are now there.
We have to go back to balance. And don't junk Keynes as he has his place, in the future...but within reason. As its not economics which is the problem but human nature. Economic solutions fit different scenarios, different mind sets. Its like laxatives and gut binders. It all depends where the body is and what its eaten. We always start with the human condition, centerpiece. Means to an end, human progress. Don't be blinded by the ideology of the means, philosophus economia; its just a means to an end. Keep your eye on what we are trying to achieve in societal terms. Thats my focus to define prognosis.
Concerning the over productive paradigm; I think that will change as we hit physical barriers of resources and the ecological ones as well. Our future will be less productivist and more intellectual in Internet type space time, not in physical consumption. We can see that new frontier emerging already. But its the chains of resource constraints which will impose paradigm change. I'm not anxed by that, but transition in euphoric mindset can be traumatic and probably will be; for the young generation. Going back to early 20 th century type consumption with cars that last ten years or more as do fridges, is not a problem.
In commerce and capatalism ones labor is the only thing of value. Everything else is just a strawman.
agreed, note that labour AND cheap raw materials, like arable, productive land, staple food from easy accessed water, energy fodder, all help along the way, by making labour more productive, whence civilization's appeal over anarchy to man. But the man who organises the system makes the money, that's the issue. We go from individual output in anarchy, or tribal society, to organised empire. Now Oligarchy capitalism. Both these last are perverted self imploding systems, and reset becomes inevitable.
It's still fueled by "slave labor"...oil is (was) the new slave...many say oil is in decline...maybe actual slavery will make a comeback again? Maybe it already is...
Failing to mention the fact that banks create the money from thin air, and charge interest on it, vs the man who works hard for his silver and loans it out with interest. So in reality it is a trade of thin air, for income. Welcome debt slave.
Does the BANK create money out of thin air, or do the PEOPLE create the money out of thin air with their LEGAL FICTION SIGNATURE?
The fact remains that there isn't enough base money to repay the debt; and strangely moeny is debt which is why we have already experienced the most massive hyperinflation known to mankind and all that is left is gargantuan deflation, which is why gold and silver will outperform every asset including paper money because unlike Au and Ag atoms, paper can be printed at will - alchemy.
The PEN is mightier than the sword because the pen can create "money" (currency) - who needs Ben Bernanke, we have ruined our own world with our pens.
That's the racket now isn't it, i.e., banksters create credit mainly by creating accounting entries and with this power they usurp the future hard-earned income of debtors. Since future income is pulled forward, current aggregate demand is greater than it otherwise would be thus inflating market prices in such a way that those who opt NOT to indebt themselves have relatively reduced consumption. Think of it this way, would housing prices have reached such ridiculous heights without the associated credit bubble into 2007? And with the boom that occurred in housing, could market participants afford housing without debt-financing? Think of purchasing a college education in the current period. Thus, the creation of cheap credit by banksters forces economic participants to assume debt to compete for access to available goods and services since prices relative to income are pushed up. Accordingly, banksters usurp the future hard-earned income of the populace via their accounting entries, and don't think the financial elite are unaware of the dynamics of their credit-fueled Ponzinomics.
Funny you mentioned that. I ran into a few video's yesterday on YouTube talking about fictitious names, birth certificates, straw man redemption, UCC, 4 corner rule, accepted for value, etc. I found it interesting. One video stated the signature line on every check is not a line at all. It is actual words printed very small that reads something like authorized agent or words to that affect. I took a magnifying glass and looked and sure enough on my checks it appears that micro printed words do make up the signature line. Even with a magnifying glass I couldn't read the exact wording but it does appear to be words instead of a line. I wonder why? Why is this printed so small and what purpose does it serve?
http://yanswersblog.com/index.php/archives/2011/05/03/the-signature-line-on-checks-is-not-a-line-at-all/
Here is an OP/ED in the New York Times tonight that is a prime example of why we're in the shit, and why we're going to stay in the shit, economically, for a long, long time.
Op-Ed Contributor: A Way to Make People Buy Homes AgainIf you read that op/ed piece, it's written by an economics professor at Berkeley.
Without even reading it, but by just glancing at the headline, my first thought was how screwed up is the system and how broken are markets when a Berkeley professor of economics, no doubt best of buds with Krugman, gets an asinine article published on the front page of The New York Times, whereby he states the government should essentially force people to buy homes?
The answer is extremely screwed up and extremely broken.
I was under the naive assumption that in a truly efficient, free market system, demand for housing would pick up when the government and the central fraud bank quit intervening, allowing the price/demand curve to normalize (meaning more people could afford to buy the house they desired, based on economic fundamentals and efficient market forces).
But I am out of touch with the 'new economics' in our 'new economy,' apparently.
We got in this situation because of government intervention in the mortgage lending business, encouraging banks to make loans that the people taking out the loan could never repay. So of course the answer is obviously to intervene in the housing market more. It's perfect.
It doesn't make it true, no matter how many times you repeat it.
No, you got into this situation because you willingly voted for the pawns that the largely faceless behind the scenes movers and wranglers put forward, you, the people, enjoyed the whoopdeedoo and circus of elections that have for all too long been nothing but smoke and mirrors, misdirection and bs, and you fell for it because it was easy, and required little mental activity on your part.
Now you are dismayed to find that you have been sold a bridge too far, and you have no control over those you have elected. And banging on about Gold Silver, food and Lead; Bitchez, is nothing more than farts in the face of a typhoon.
You have little chancer of recovering the game unless you can find the heart and mindset of your founding fathers who had far more guts and gumption than you bunch of politically weekminded freeloaders. Wake up, and at least try to take back what you have lost, forgive me for an old adage, but its better to stand up and die fighting than to live on your knees! I have few years left on this coil, but I really hope to live to see you pull it off.
This is a tired assertion with no basis in fact. The housing crisis was a result of a bubble created by lending to anyone and everyone simply because the banks made money doing so whether the loan ever had any chance of being repaid.
THIS (the ability of banks to make money by making crap loans) is the direct result of deregulation and crony capitalism.
The CRA (to which you were no doubt referring) had NOTHING to do with incentivizing the loaning of money to middle class people to buy tract mansions in Nevada and Florida, so give it a fucking rest already.
Mortgage fraud, anyone?
There's Ameriquest:
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2010/10/25/how-a-gang-of-predatory-lenders-and-wall-street-bankers-fleeced-america-and-spawned-a-global-crisis.aspx
And, of course, there's ubiquitous "good corporate citizen" poster child GE:
http://www.nationofchange.org/fraud-and-folly-untold-story-general-electric-s-subprime-debacle-1325956044
The enitre industry was rotten on the inside, from the ground up, sea to shining sea.
Truth in Sunshine... "I was under the naive assumption that in a truly efficient, free market system, demand for housing would pick up when the government and the central fraud bank quit intervening, allowing the price/demand curve to normalize (meaning more people could afford to buy the house they desired, based on economic fundamentals and efficient market forces)."
..................................
I read the short article that you linked. What the Proff is advocating is another risk transfer from banks to the public sector (government, or we the people). This is not a new idea but goes back to, at minimum, the creation of the FHA in 1934. Prior to the great depression most homes were financed by baloon loans of, typically, five year duration and the mortgage was held by a local bank. To get a mortgage from a local bank one had to be a solid citizen and respected within the community the bank served.
With the onset of the great depression FDR was well aware that an extreme crisis in capitalism had occured and was, like Bernanke now, pushing through new ideas in an attempt to get the US economy percolating again. FDR realized that home ownership could be a huge driver for the economy by providing jobs in the housing industry. So the FHA was created to guarantee loans made from local banks to wannabe home owners. Of course, local banks could then lower their lending standards, terms, and interest rates, since the US Gov guarantee had their backs. The FHA was followed by many other housing agencies; Ginnie, Freddie, Fannie, etc. All of these agencies helped shift risk from local banks to the public sector, but at the cost of distorting the 'free market economy', since most of the loans that were guaranteed by the US Gov would have otherwise not been made.
My point being; 'the truly efficient, free market system' has been dead as a doornail for about 80 years.
In order to 'save capitalism' FDR had to modify it... personally, I would use the term destroy it. We have not had true capitalism in the US for a very long time and some would make a case that we have never had true capitalism. We most certainly have not had true capitalism since the creation of the Federal Reserve in 1913. For a period of time after WW2 we had a socialist democracy with a large segment of our economy, small business, dependent on capitalism. Since 1971 our country has morphed or shifted more and more of the capitalist portion of our economy toward socialism and has made existence for small businesses ever more difficult by ever more intervention by governments at all levels. Since 1971 the US Gov has grown tremendously as have most state and local governments. All those bureaucrats must justify their jobs so they dream up all sorts of onerous new regulations and paperwork to pile on businesses. All the new bureaucrats must be paid so ever more of small business income goes to Federal, state and local taxes and fees, plus accountants, lawyers and office staff that all adds to overhead. What we are left with in no way resembles free market capitalism because it is so detrimental to small business. The US Gov, along with the Fed Reserve, is in the business of picking winners and losers... and small business, which has always been the driver for jobs, is the loser.
When I read artilcles like the one you linked I always remind myself; government cannot create wealth and the associated savings that come from excess earnings. All government can do is redistribute wealth through taxation, inflation, and other hidden and devious schemes... and governments are good at enabling the privitizing of profits and socializing of losses.
Anyone wasting money on the class of the proff that wrote the article should get a refund from Berkley.
Snidley, that was a GREAT post! Don't get a BIG Head!
Go fuck yourself... or, have your cellmate do it for you... fucking troll.
"In order to 'save capitalism' FDR had to modify it..."
It should be rewrtitten as:
"In order to 'save crony capitalism' FDR had to modify it..."
FINANCE ALL THE ELITES!!!
http://financeall.tumblr.com/
governments are the source of our problems not the solution.
after 25 yrs in government I have never seen the government department i worked in operate to a level ABOVE 'barely satisfactory'. Generally it operated to the standard 'Piss- poor"
the economy CAN fix itself. governments should just leave it alone.But unfortunately politicians are not intelligent enough to do this. and they will NEVER relinquish their power - unless we have major social upheaval. Which, IMHO, is coming. Major war is a possibility.
Sadly we are now in a financial trap from which there is no escape. the only question is 'when will it spring?'. The current focus on the EZ is simply fog; the US is in just as bad a situation.
I fear the worst. The middle and lower classes are now, finally, aware that there is a problem and some are beginning to give up hope. When they give up it will be all over.
Points well taken, Snidley.
I still maintain that the inredible interventionism leading to massive distortion of markets hasn't been this brazen nor destructive since...
...since...
Hey! Now that I think about it, since pre-Plaza Accord or Bretton Woods, which both had to do with debasing our currency and 'fixing' (for at least some time) the value of other fiat toilet paper of different demoninations (and going off the gold standard).
Runs on deposits are not the issue. There would be no fear of such runs if funds had
not been confused and colluded (ie stolen via rehypo) -ie keeping with glass-steagall.
We did a stupid thing. We needed liquidity and leverage for all the new trades and
hedges of the derivatives math and tech boon. The mistake was to use deposits
and savings funds as a backstop instead of leaving this to the OTC market.
The author is absolutely right on the need to match duration and reserve ratios.
Manmohan Singh (from the IMF, not the Indian PM) says some similar things.
he talks not just of duration mismatch but quality of collateral and reserve ratio.
he is suggesting a transaction tax to fund a central guarrantor, like the FDIC is
to deposits, but for derivatives markets instead. This also puts skin in the game
to discourage abberations like naked shorts and very lax failures-to-delivery.
http://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf
http://www.imf.org/external/pubs/ft/wp/2011/wp11289.pdf
http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf
Don't get caught up in the election year hopium, there is no way out of this, especially this hind sight 20-20 bullshit.
If this is implemented today, deflation will follow and debt will be defaulted on. As we all know promise to pay debt is equivlent to wealth in our Brave New World, and therefor wealth is destroyed. This will lead to a deflation cycle, there is no way around it. Goods (food especially) will become scarce and unaffordable.
You can't have deflation and scarce/unaffordable goods at the same time. Deflation isn't all bad anyway. If prices get inflated via the overextension of credit the remedy is going to involve...de-flation
Debt needs to be defaulted on at this point and fully recognized as such. Government(s) are trying their best to label real and pending defaults as something else (Greek Sov. debt, sweeping FNM, FRE under the gov't rug etc.) The destruction of phony "wealth" based on bad credit isn't really wealth destruction, its recognition of reality.
I actually thought this post was a very good, basic explanation of the fundamentals of banking and money markets. Many would benefit from finding this in their inboxes.
I'm speed reading. " JGB's"?
Watchoo talkin 'bout, Willis?
I'm the spdrdr, and see no reference to this acronym "JGB" anywhere in the article.
Pls xpln yr qry.
JGB typically is the acronym for Japanese Government Bonds.
Just sayin'.
Loaning to the US seems pretty dumb. Inflation was 3% for 2011 and most government loans don't pay inflation. Then there's the minor factor that the US is broke.
TheSilverJournal.com
That's the whole point... the FED's policies force savers to get cockstamped and require everyone to jump into whatever vehicles promise better yield. I guess a better question would be, who is a better counterparty to loan to than the treasury? (presuming you are so risk averse as to willingly eat all of our inflation, rather than attempt to offset it, at least partially, with some yield). Where are the solvent counterparties? Where are the solvent borrowers? It's not just sovereigns...
Wealth/Income/ Hmmm . Let's PontIficate that ( adjective)
Andrew Jackson's Skeletal Remains For President 2012
"He killed the central banks once, he can do it again."
<deleted>
Parental (Military) Surplus, I mean service.
...yeah, babies can not work their way out of being taxed, before they are not aborted, they are born marked by debt and are held in contempt. LMAO. Ah, the Bonds of ''freedom independence liberty and justice for all''. LOL.
Objection, labor shall not be aborted in agreement, therefore life bares no Constitution, life defines the new world order black hole. LMAO! http://bible.cc/leviticus/18-21.htm
http://www.youtube.com/watch?v=p-job9wwKPM&feature=related
What happens when there is more wealth than income? OOF infinite economic model?
That my sir...is PURE SOCIALISM
There is always more wealth than income. There are many objects that are a store of wealth, such as a forest, tar sands, a clean freshwater lake, a great idea, etc.
There is never more wealth, or less wealth, and there is no correlation to income. Wealth is a fixed amount, abstract in concept. You can't create more and you cannot destroy it either. What people keep referring to is the quantity of wealth they posses. We need another term in order for this to make any sense, or you get the bastardized understanding being flaunted about. How about asset.
People hold assets, that represent a certain portion of wealth. If someone finds gold on a meteor that landed on earth, or if someone has a boon in a harvest and triples their yield of corn, they do not increase wealth, they increase their own asset holdings, but they have in fact readjusted the asset holdings of everyone else on planet earth also, but they did not change wealth.
Wealth is a ratio, and as such, it relies on a constant, and as such, is a universal fixed amount, a value divided amongst all persons holding assets on the planet. Your asset holdings at any given time determine the relative portion of wealth you have at any given instant. So in fact, as I understand it, wealth is always transferred, it can never be created or destroyed, technically.
The concept of wealth may not change, but the quantities involved do. The instant new resources are discovered or a new idea created, the volume of available wealth increases. Distribution into a growing population is another matter. You could argue that physical resources exist whether humanity knows about them or not. What about ideas? Are they created from thin air, conjured into being from nothingness, or are they existing hidden principles waiting for discovery?
You could resort to a discussion of open or closed universes and entropy, but then you run into the problem of whether the human minds ability for idea creation is infinite or constrained.
I understand what you're saying, but Wealth cannot increase because that term refers to a relationship of consumer power amongst all people at any given time. So even if you increased everyone's asset values by 100,000,000%, you've effectively done nothing. And if you increased global asset values, but it wasn't equitably distributed, all you've done is make everyone poorer in relation to the person(s) who recieved the new asset value, but you haven't really changed the wealth situation.
I am not suggesting progress / innovation / increases in value don't occur, I'm saying that once put into place, they don't modify the overall wealth of the world, they modify the portion of the wealth any individual may have control over, by means of their stake in the equation.
I'll see if i can find anyone else online who has written down what I'm trying to explain. I haven't really read through this carefully, but they seem to be saying something similar to what I'm saying.
http://www.financialmore.com/gold-silver-investing/wealth-is-only-transferred---not-destroyed
A loan in an exchange of other people's money for personal income... 99% true in terms of total amounts loaned.
There is an expansion of credit! There is no particular limit to how far it can expand. In fact, it will develop iteratively into the same topology (mathematical structure) as one observes with fractional reserve banking under a proper, unadulterated gold standard!
****************
There is a limit to how far it can expand-
We're seeing today what Mises described as "when the pool of greater fools drys up" and at that point-credit expansion ie: inflation makes a u-turn and becomes a credit contraction ie: deflation-
"R" "U" Retarded?
Yes-but I'll bet you can't prove me wrong-
You're wrong, as long as said credit is 'as good as gold' there is no limit. The problem nowadays is it is mostly 'as good as shit'.
I'll grab a throat over that comment.
Yen Cross-
I knew you couldn't prove me wrong-your one liners don't impress-
You're wrong, as long as said credit is 'as good as gold' there is no limit.
**********
As long as?
And then what happens when it isn't or when the bank thinks it isn't?
http://bit.ly/A3CLNG
http://research.stlouisfed.org/fred2/series/M2V
Does it not look "if" you know how to interpret data-that the "limit" has been reached?
The ''borderless'' Great Wal Mart Of China ''consumer'' is a mad cow.
...Denny Crane.
http://bible.cc/matthew/4-2.htm
http://www.biblegateway.com/passage/?search=Revelation%2019:18&version=KJV
Um... isn't there a demand side to credit that puts a limit on how much credit you can create?
"Um... isn't there a demand side to credit that puts a limit on how much credit you can create?"
.....................................
China, Japan, Russia, and others have stopped increasing their holdings of US debt. The Federal Reserve continues to purchase US debt...some openly, some hidden.
So, we are in a grand experiment conducted by Bernanke in conjunction with other Western central banks, the TBTF banks, and the broker dealer network.
Simply put; the experiment is going to determine how much soverign debt that the Fed and other central banks can purchase from over indebted soverigns, who are issuing ever more debt, while avoiding a default in the debt markets... or, as an economist would say... a dislocation in the soverign debt markets. Dislocation, under normal circumstances when interest rates are free to rise and fall without central bank intervention, would have happened long ago if not for massive intervention by central banks to keep interest rates artifically low.
Are you enjoying the experiment?
I like the trading side of ya. I'm impressed.
You could put your hard time to good use by learning a bit of math. You will find the math books in the section of the prison library near the psychology section which you might also find beneficial to your future in 'bullshiting for fun and profit'... or, 'how I lost my ass and others money daytrading with the big boys'... That is, if the prison officials are foolish enough to release you.
You guys Im new here so please don't be to hard on me. This might be a little of topic, But don't you guys think the real story is, why the CNBC and FOX B and Blooms never ever give any of these issues any real air time. Is all the media that Sensored ? Does the MSM even care about any truth at all. All I hear on the MSM is about some V shaped recovery, You guys I know they have a agenda but how can they censor everybody that's on there network. Do you think they tell Becky Quick and Steve Lesman and Joe what to say, I mean how manufactred is the news now,,
TeeVee rots the brain...because everything on it is sugary and empty of substance. All you need to know. :-)
Stay around ZH and learn from all these smart folks (they pull no punches).
skateboarder, please, please, please don't spell censor two different ways in the same paragraph, it hurts so much. other than that keep reading ZH everyday and all will unfold before you, like a giant mulva
Ok i will spell it the same way next time, But please please start your sentence with a capital next time.. Now do you think the networks tell there people not to metion subjects like Mark to market ?
skater, capitalization is so fifth grade. we're talkin......and while we're talkin................there......their........they're...... pop quiz which is the correct usage
skater 3... 2....1...GO! Now do you think the networks tell there people not to metion subjects like
dude i'm only giving you a hard time, you're awesome (see correct usage for "you are") but just remember you ARE ON A COMPUTER it comes with Spellcheck/Thesaurus and is handy when communicating in public. Your (again see correct usage for your) education system has let you down and is readily apparent to anyone who reads what you write (not spelt "right"). Not that your system of education didn't try and teach you these things but FAILED to instill in you WHY SUCH THINGS ARE IMPORTANT TO THE BETTERMENT OF HUMANITY/YOU/AND NOT YOUR OWN PERSONAL GAIN/ENJOYMENT.....skateboarding is masturbation on wheels, you know that right??
Naka... The guy didn't come here for an English lesson. Stop being an ass hole and address his questions.
Assume the guy is legit unless/until he proves otherwise.
.....................................
To: Poster asking about main stream media...
Yes, assume everything they say is a distortion at best or a bald faced lie at worst. The MSM are owned by the same 1% of Americans (and foreigners) that own most of the other assets in America, and it's in their best interests to broadcast 'sickeningly, flowery good news'. It's not in their best interests to broadcast the truth, which would cause the growing angst of the majority of Americans to increase. The 1% that own almost everything WILL DO WHATEVER IS NECESSARY to stay in lucrative and powerful positions.
I broadly agree with yr comments abt MSM, Snidley. But, I think there is a whole lot LESS Deliberation and Conspiracy behind the way they act. I dont believe that there is a secret Cabal that directs suppression and censorship - although it might look that way from out side.
IMHO the media
A. keeps it short becuase the attention span of the sheeple is so low -thus a lot of detail MUST be omitted
B. keeps it simple because the intelligence ( remember half the people have an IQ below 100) of the sheeple is so low -thus further detail MUST be omitted
C. Most importantly. they want viewers. And people watch to have their/there/theyre EMOTIONS driven. Because in their sad, desperate lives, the drones need a bit of emotion once a day to remind them that they are still alive. Anger, hate, love, compassion; it doesnt matter what; it sells. Witness Oprah............
agree snidley, apologies to all, sometimes you just have to get your crank on, will revert to snarc mode
Blogging is masturbation on keyboards. 99% of human activities are some level of masturbation, which is why we live in a jack off society! ( unverifiable statistics used in this opinion).
Sk8boarder, try reading Brave New World, by A. Huxley or 1984, by George Orwell. Its an entertaining way to get your answers about what is going on.
Mainstreem media is total crap. Good to see another skater on ZH! Keep rippin!
giant mulva? where do I get one of those?
walmart, 11:30 p.m., bacon section.
a long shot alternative, water aerobics classes.
THe news media is driven by what sells. What sells is controversy: Romney said, Gingritch said, open mariage, Bain Capital, Scott Walker is evil, you'll never believewhat Ron Paul said 20 years ago. Controversy drives the news cycle which can only focus on a few topics at once, and the public soon becomes habituated to each new controversy and looses interest. That leaves little room to focus on something like an impending apocolypse day after day. What's more people can't believe something that catestrophic could happen. Heck the day before 9/11 most people would have called flying airplanes into the world trade center science fiction. Thats a big part of the equation.
Add to that, the current belief that we are in a recovery. So steeped in Keneysian economics are the vast majority on CNBC, Bloomburg, and the major news networks, that they can't even admit massive stimulous might not work. Oh they occasionally humor the detractors that point out how nuts this is, but they believe in their core that it works despite ample evidence to the contrary. They can't see the parallels to policy today and the depression, or how badly Keneysian stimulous has workd for Japan (who now has 200% debt to DGP). They are deep in rationalization mode. They see signs of recover and have blind spots to all the problems. And for some reason, that completely escales me, they somehow believe that the national debt can just keep growing forever without impact and that it will never ever have to contract. They can't see that the burden of all that tax money going to pay for non-productive activity (activity that does not provide goods and services that people want need or desire) isn't already hurting the economy.
You don't have to censor people to shut down their viewpoint. You just make sure the dominant view is the one you prefer and treat any guest who disagrees as an oddball who just doesn't see how right you are.
I noticed the other day when scrolling through the news channels that JPM had a commercial spot during prime time on FOX. All of the major networks have similar practices. No doubt the networks keep a leash on anti-bank criticism. If their programs had frequent, harsh commentary on banking practice in the US and elsewhere, would they draw the advertising dollars that they currently do? Unlikely they'll bite the hand that feeds them.