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How The Federal Reserve Is Purposely Attacking Savers

But bungling badly as it does
Monday, October 20, 2014, 11:36 AM

There's something we 'regular' citizens wrestle with that the elites never seem to: a sense of moral duty.

For example, following the collapse of the housing bubble, many people struggled with mortgages they could no longer afford to pay, fearing the shame of default. Many believed defaulting was wrong somehow; that it was their moral obligation to pay their mortgages, no matter how dire their personal situation. And of course, the mortgages lenders did their utmost to reinforce this perception.

In a perfect world, we would honor our debts and obligations, every one of us. But the world is an imperfect place ,and moral obligation is something that almost never enters into the decision matrix of our society's richest. Or the banking industry.

For them, the number one (and two, and three...) rule is that whatever is expedient and makes the most money is the right thing to do.

For the bottom 99%, it’s like playing with a stricter set of rules than your opponent: you’re not allowed to hit below the belt, and they’ve brought a baseball bat into the ring.

Note how this guy had to fight through his middle class conditioning before coming to a sense of peace over his decision to enter into a short sale on his house:

How a short sale taught me rich people’s ethics

Sep 29, 2014

The closest I ever came to acting like a rich person was two years ago when I short-sold my primary residence. I might have been able to keep it but strategic default made life easier. I owed about $400,000 on a house that short-sold for $150K. The bank lost more than a quarter of a million dollars, and I lost at least $80K in down payment and property improvements.

I was taught growing up to “keep my word” and that your handshake “meant something.” Yet businessmen and individual wealthy people make decisions that are far less moral than a short sale. People “incorporate” so they can avoid legal responsibility for individual actions.

It works great. You can stiff creditors, declare bankruptcy, pollute daily and raid pensions to enrich individual executives. If it all goes wrong, like it has so often for Donald Trump, you can keep your mansions and individual fortunes.

I entered the shark-infested waters of high finance with a short sale. It was the worst ethical decision, but the finest, most profitable business moment, of my adult life. It was an informative, even transformative, experience.

(Source)

This poor guy has a very bad case of ‘middle class morality’. It's a very real phenomenon. All our lives, we are all taught (programmed?) to stay within the true and narrow groove of middle class life, pay our bills, and be on the hook should things go awry.

Not everybody holds that view, however. As he continues in the piece, the author discovers something important along the way:

I always knew business was getting over on me, but I had no idea the extent until I started looking to short-sell. I first learned all I could aboutprivatehome financing. I called up some shady investment groups around town and questioned them at length. I didn’t end up using them, but they were frank, informative and unashamed.

“Who would pay 11 percent on a home loan?” I asked.

“Rich people,” said “Bill” from the legal loan-sharking company. “The rich have terrible credit.”

Rich people = bad credit: Just let that sink in.

Bill told me in roundabout ways that rich people never pay a bill if there is any way around it. If something goes wrong in an investment or a business, they always preserve their own assets first.

Rich people have terrible credit. They know that there’s a system and it has rules. And, for them, these rules can (and should) be optimized for their own benefit. So they do anything and everything that works to their advantage.

There’s a reason and a logic to that which I can appreciate, but it makes me wonder where the rest of us obtained our deep-seeded beliefs about duty and responsibility towards debts.

Similar to rich people, banks do not have any entangling moral restrictions on their behaviors. That absence allows them to get away with extraordinary misdeeds, none more obvious and damaging than those that the Federal Reserve has perpetrated on the nation, specifically, and the world, more broadly.

To understand why, we first have to discuss something called Financial Repression.

Financial Repression

In my recent interview with Daniel Amerman, to whom I will credit much of the concise thinking and for unearthing the sources that I will weave throughout the remainder of this piece (please read his excellent article on Financial Repression here), the truly immoral intent of the Fed's policies really sank in.

In response to the Fuzzy Numbers chapter (18) of the Crash Course, reader JBarney pondered the following:

Thanks for putting this update together. I think one of the problems is there are so many moving parts, so many manipulated numbers it is difficult to get a clear picture. The way it is organized here is helpful.

However,I can't help but wonder about all of the implications of these numbers for the real economy and people's lives. One of the sections which really hits home was the impact inflation has on all of this. If these are the numbers now, what will it be like when things really start to change?

The answer is that while inflation always steals from savers, it really does its dirty work when the central bank and government conspire to create a condition of pervasive and unavoidable negative real interest rates.

This is the heart of Financial Repression: an environment in which you literally cannot save money without paying a penalty.

The main takeaway of Chapter 18 on Fuzzy Numbers is not that the government fibs a little now and then (okay,all the time) merely because that's politically expedient, but it does so in service to a larger and more pernicious aim: forcing people to accept an inflation rate that is higher than either their income growth and/or the market's safe rate of return.

As soon as you are locked into a negative interest rate regime, your capital is losing purchasing power. But simple accounting rules dictate that loss of wealth had to go somewhere. So where did it go? To somebody else.

Negative real interest rates transfer money from every saver to every over-extended borrower. This is especially true with the government (largely because of its special revolving door relationship with the Fed, which both issues the money out of thin air and then buys government debt forcing rates into negative territory).

It's really that simple. The Fed has openly and actively suppressed rates -- not to help the credit markets, as they claim, but to engineer a condition of Financial Repression. Because that's what the government needs to stealthily take your wealth to pay down the prior debts it accumulated.

Thus 'negative real rates' are the essential component of transferring wealth from the many to the few, with the 'few' being defined as the government, Wall Street, and others who exploit leverage and liabilities at sufficient scale to be on the right side of that wealth transfer.

This well-known phenomenon is a thoroughly accepted and well-described practice of governments and central banks everywhere. One of the better descriptions of it comes to us courtesy of the BIS in this working paper published in 2011.

From the abstract:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts.

A subtle type of debt restructuring takes the form of “financial repression.”

Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.

In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s.

Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt.

Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation.

Inflation need not take market participants entirely by surprise and, in effect,it need not be very high(by historic standards).

For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 2 to 3 percent of GDP a year.

(Source)

Let me decode that.

  • Step 1: Governments get into trouble by borrowing too much.
  • Step 2: Rather than pay this down honestly via cutting spending (unpopular) or by defaulting (even more unpopular), the government conspires with the central bank to slowly liquidate the stack of obligations by forcing negative real interest rates on everyone.
  • Step2bHang on one second...it wouldn’t work if people could dodge the Financial Repression, so a ring fence has to be built out of capital controls and explicit rate caps on and across the whole spectrum of interest-bearing securities.
  • Step 3: Sit back and wait for everyone with savings to contribute their purchasing power to those who issued the debts, be those public or private entities.

And this is exactly what has happened. All of the talk about the Fed focusing on unemployment or inflation or whatever are red herrings. What the Fed is really trying to do is to create a set of macro conditions that will allow the federal government to slowly crawl out from under a pile of debt and entitlement obligations that it literally can not pay by honest, above board means.

I guess if we were to imagine a "Step 4" in the above process, it would be to wait for the head of the central bank to come out and deliver a speech in which she expresses a grandmotherly concern for the wealth gap that naturally results from all this, but to deflect attention away from this being a direct and understood consequence of the Fed's intentional goal of financial repression and towards some failure on the part of those who have been targeted to donate to the cause of bailing out the profligate and rewarding the borrowers.

Oh, wait. That did just happen. Here it is, Step 4, courtesy of Janet Yellen last week:

Why Fed Chair JanetYellenis “greatly” concerned about growing inequality

Federal Reserve Chair Janet Yellen on Friday expressed deep concern over widening economic inequality in the country and called for tackling issues such as early childhood education and encouraging entrepreneurship to help narrow the gap.

[Comment:Oh boy...must contain my emotions...did she really just deflect the consequences of the Fed's policy of financial repression towards 'early childhood education? Yep. That's like a burglar saying that we need to invest in better metallurgical processes as the means of preventing doors from being kicked in so easily.]

In a speech at the Federal Reserve Bank of Boston, Yellen said steady growth in inequality over the past several decades represents the most sustained rise since the19thcentury.Living standards for most Americans have been “stagnant,” while those at the very top have enjoyed significant wealth and income gains, she said.

[Comment: Glad the Fed finally noticed that those at the very top have been making out like bandits! This was something I said explicitly would happen as a consequence of future Fed printing back in 2008 in the Crash Course, before the printing even started. How is it that I knew that this would happen back in 2008 and the Fed is just now noticing this observationally? Is my research department better than theirs? In fact this is a very well known and easy to understand process. That the Fed is feigning ignorance speaks volumes about how ignorant they believe we all are. This is a sure sign that we are trapped in a dysfunctional relationship with an abusive partner.]

“I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history,among them the high value Americans have traditionally placed on equality of opportunity,” Yellen said in prepared remarks.

[Comment: Once we accept that the Fed is openly and specifically creating the wealth gap as a matter of active and ongoing policy, which it is, then it's actually more appropriate to ask if the Federal Reserve is compatible with values rooted in our nation's history. The answer, obviously, is "no."]

The problem of inequality is an unusual topic for the leader of the Fed, if only because the central bank’s ability to address the issue is limited.

[Comment: Stop right there Washington Post! You've just inserted an assertion that might as well have come straight from a PR press release from the Fed. I, for one, refuse that claim and reject it completely right here and on grounds that hardly have to be substantiated, but I will just for fun. When the Fed buys 'assets' (really debt instruments) from major financial firms using freshly printed money they are,by definition, buying those assets at steadily increasing prices which means that those who hold the largest amounts of these assets get the richest. When the Fed secondarily targets the stock market as something to 'go up' and the top 5% own 82% of all stocks, then the Fed's role is anything but 'limited.' It is direct and proportional and they are 100% responsible for any and all gains that accrue to the top via the 'miracle' of asset inflation. Period. End of story. See also any of the innumerable charts plotting the S&P 500's rise along with the growth in the Fed balance sheet for further confirmation. Sorry Washington post, assertion denied!!]

Yellen listed four factors that can influence economic opportunity: investing in education for young children, making college more affordable, encouraging entrepreneurship and building inheritance.

[Comment:OMG. She just blamed the victims and did it in a very let them eat cake kind of way. How aggravating(!). According to Yellen, if people are finding themselves getting poorer what they need to do is stop scrimping on their kids, become an entrepreneur and then somehow go back in time and have rich parents. This statement of hers calls for pitchforks and torches. Literally. Without a shred of decency, she has shifted all blame from the Fed to the victims. How corrupt or morally adrift does someone have to be to blame their victims? In a criminal case this would be used as evidence of sociopathic if not psychopathic behavior and used by a prosecutor to call for a maximum sentence to prevent a dangerous individual from running loose in society. And rightly so. Such individuals are poor prospects for rehabilitation.]

Yellen did not address in her prepared text whether the Fed has contributed to inequality.

[Comment:No surprise there. Ted Bundy never acknowledged the harm he caused either.]

(Source)

At this point, based on Yellen's testimony, I think it's time to say what everybody is already thinking: the Fed Chairwoman is literally displaying psychopathic tendencies by blaming her victims. I'm serious: if the Fed were an individual, we’d have no problem identifying its behaviors in psychologically pathological terms.

I understand that some, or perhaps many, will excuse this last point by saying that the Fed cannot possibly state the truth because doing so would create loss of confidence or public anger. But I submit that the so-called "white lie" defense is utter nonsense.

A greater harm is done by lying than by telling the truth. You can get away with small lies for a while, but they never actually go away, they just sit there corrosively undermining the very foundation of trust upon which civilized society rests. Large lies just do more damage over a shorter period of time, and that’s exactly where we are today. This explains much in terms of people’s general sense of unease despite an apparently reasonable economy and awesome living standards (by any historical measure).

Here's what truth would sound like if I were to re-write Yellen's speech:

My fellow Americans. Decades of poor fiscal restraint and accommodative monetary polices have brought us to an uncomfortable juncture.

My intention today is not to cast blame – there will be plenty of time for that later – but to take stock of where we are so that we can all decide on the best course forward, openly and honestly, as should be the case in a democracy.

There are no easy choices at this point, only a rather poor range of options spanning from somewhat unpleasant to potentially catastrophic.

The heart of the matter is simply this: the US government has built up an extraordinary amount of public debt, and an even larger pile of unfunded liabilities.

There’s simply no way for those to all be paid back under current terms. And given recent trajectories in play with respect to economic growth and deficit spending patterns, those debts and liabilities are only growing larger with time.

Quite simply our choices are these:

  1. Pay down the debt by taking in more revenue than expenses. This is also known as austerity and given the size of the debts and other obligations, several decades of severe belt tightening would be required. This program would be extremely painful for nearly everybody and would require massive tax hikes coupled to major spending cuts.
  2. Default on the debts and obligations. This simply means not paying people, investors, institutions and countries what we have promised to pay. Down this path lies the potential for massive destruction of our financial and political systems, so we have chosen to not entertain this path any further than to mention it exists.
  3. Do nothing and wait for a fiscal and monetary accident to happen. This is a guaranteed disaster that could result in the sudden and permanent decline of opportunity in this country that would be so painful we cannot even predict the possible outcomes.
  4. Engineer conditions where negative real rates of interest slowly allow the government’s obligations to fall relative to inflation. Over the span of decades this is the least painful route and our country has been down this path before.

We’ve selected path #4 as the least bad option. Since 2009 our policies have been geared towards #4 and we see no alternative besides staying on that path for as long as necessary. The alternative is the literal bankruptcy of our nation and we cannot and will not allow that to happen. Not on our watch.

While path #4 is the least objectionable of them all, it comes with its own share of unfortunate consequences and injustices. At its heart, negative real interest rates are an effective tax on savers and those whose incomes fail to keep pace with the inflation we are creating as an overt act of policy. This generalized and widespread loss of purchasing power takes a little bit from everyone, rather than a lot from a few systemically important institutions such as your federal government, which spreads the pain widely, and therefore causes the least disruptions to our daily lives.

Path #4 has a name: Financial Repression. This policy combines negative real interest rates with various forms of capital controls and tax policy to assure that nobody can evade it.

Obviously this is not fair, nor is it in alignment with our national narrative of prudence and hard work being rewarded because, truth be told, it rewards the profligate and those who produce nothing of real value but can play the game of high finance well. Yet here we are without any better options before us, and so we reluctantly chose Financial Repression.

One other distasteful ‘feature’ of the program of financial repression we’ve been putting you all through is that the rich get richer. Until or unless there is a massive change to the taxation and wealth re-distribution programs of the federal government, the Federal Reserve’s program of Financial Repression will continue to deliver an ever-larger gap between the wealthy and everyone else.

Such is the nature of the compounding function combined with the inequity of who gets first access to the newly created funds we make available in order to drive the interest rate curve into negative territory.

Are there any risks to this program? Well, the largest of them really needs to be discussed. Financial Repression has worked in the past, but it has only worked because we experienced both inflation and economic growth in equal measures.

Today, for reasons that we are still studying, neither the wage growth necessary to incite the sort of inflation we need nor economic growth have arrived as we thought they would.

If economic growth does not return, then the entire program of financial repression could well fail, and fail spectacularly. Everything depends on a return of economic growth sufficient to service the vast increases in debts that will result from the program.

But if that growth does not materialize? If the world is now stuck in a ‘New Mediocre’ of low growth then one risk is the possibility of a crisis that will be rooted in a permanent loss of confidence in debts of all forms, but government debt specifically. Down that road lie currency crises, and a wide variety of related financial upheavals the final result of which is what most will experience as a massive destruction of wealth.

We are working hard to assure that these risks are well contained, but you should be aware that they exist

After all, this is all of our futures that we are experimenting with and we do not have a playbook that we can follow here in 2014. We are in wholly uncharted territory. The exact arrangement of conditions we see across the global landscape is brand new.

We’re sorry to have to be in the position of engineering Financial Repression, but we felt there were no other options before us and we hope that you agree that a slight yearly discomfort to almost everyone is preferable to a major disruption to our way of life, our political system, and the possibility of worse things.

Is this fair? No. Was it avoidable? Yes. Is there anything we can be doing differently today? Not that we are aware of. The choices are between bad, worse and utterly terrible. We're choosing the bad path, and we hope you’ll agree that this is the best we can do at this point.

But you deserve the truth because it’s already completely obvious and available for anybody with access to a computer. Since we are all in this together and we’re all being asked to sacrifice in some way, it's much better that we all agree on the treatment plan.

It’s not a perfect plan, far from it. But considering the alternatives, this is the best one on the table.

If you want to make it more fair, more equitable, and with an eye towards building to a future in which we can all share some hope, you’ll need to turn to your policy makers and ask them to work from the fiscal side to correct what they can. Without a profound realignment of priorities, we’ll just get more of the same and, truth be told, eventually more of the same turns into a fiscal and monetary disaster about which nothing can be done except absorb the pain and loss that it will bring.

Conclusion

Context is everything. The growing gap between the very wealthy and everyone else is a consequence of Fed policy.

Whether you decide to be shocked, angry, or scared by Janet Yellen’s recent speech is up to you. Personally, I'm pissed off at being lectured to that falling further behind the super wealthy is my fault for not investing enough in my kids, not being entrepreneurial enough, and not having wealthy parents.

That level of ‘blame the victim’ is psychopathic, utterly appalling, and I reject it on every level. Worse, the level of trust destruction that happens with such a tone-deaf speech stains our entire national leadership. It is the modern version of Let them eat cake.

Once an institution, be it royalty of old or the Fed today, gets so far off the rails that they cannot locate their own role in the misery they see around them, it’s a sign of a huge problem for that society.

Ms. Yellen should not be allowed by anyone to get away with such a patently and provably false set of arguments. She should have been soundly booed off the stage and the President should be asking for her resignation immediately.

But we’re so far down the rabbit hole that almost nobody blinked an eye at the speech, and thought it perfectly normal.

For you personally, you need to be aware that the debts, deficits and liabilities across the entire OECD world are continuing to grow at a far faster pace than GDP, and far faster than oil production and discoveries of low-cost oil reservoirs (those schooled in net energy understand this to be the real issue), and that the most likely outcome, someday, will be an extraordinary financial accident.

It will be called something else -- a period of wealth destruction -- but for those who can see it coming, it will actually be period of massive wealth transfer.

And we'll keep up our efforts on how to see clearly amidst the intentional obfuscation, to help those aware to the situation avoid ending up on the wrong side of that transfer.

[/rant]

~ Chris Martenson

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95 Comments

Adam Price's picture
Adam Price
Status: Member (Offline)
Joined: Oct 22 2014
Posts: 7
The entire premise of this

The entire premise of this article is BOGUS and shows a complete lack of understanding of the only 2 interest rates the Federal Reserve controls and how banks determine interest rates they pay on any and all time deposits.

The Federal Reserve CANNOT AND DOES NOT CONTROL INTEREST RATES AT ALL IN THE ECONOMY and only controls the following 2 interest rates which have nothing whatsoever to do with the economy:

1) Federal Discount Rate - currently 0.75%

2) Federal Funds Rate (which it influences) - currently 0.25%

Both rates are only for VERY SHORT TERM LIQUIDITY PURPOSES AND APPLY ONLY TO BANK BORROWING, with the Federal Discount rate being for direct borrowing by banks from the Federal Discount Window at the Federal Reserve and the Federal Funds rate being for interbank borrowing.

The only 2 rates set by the Federal Reserve have absolutely nothing to do with the interest rates that banks pay on savings account, other than to "influence" the banks to perhaps pay higher or lower rates on those accounts.

There is no minimum amount that was ever coded into regulations that banks have to pay on a savings account, although there were once maximums with Regulation Q which was part of the Glass Steagall Act and those were 5.25% for banks and 5.50% for thrifts (savings and loans).

Banks USED TO GENERALLY FOLLOW the Federal Discount Rate in terms of what they would pay savers as recently as 2007, but that was before they discovered that they could pay savers 0.000000000000000000001% and not have any significant loss of deposits.

As long as banks have LOW DEMAND FOR BORROWING against depositor funds, the chance of banks "competing" with other banks to pay higher rates to attract funds (which used to include FREE TOASTERS, etc. along with bonus interest rates for a period of time) is nada, zip, zilch, and nil.
 

gillbilly's picture
gillbilly
Status: Gold Member (Offline)
Joined: Oct 22 2012
Posts: 423
I agree

Brad, I remember those days. It was annoying to see everyone get a prize of some sort. Don't know if you're still teaching, but many schools have moved away from that. We all have our limited experience, so I'm only speaking from mine. Some schools are turning out excellent learners, others not so much. I agree with Hugh as well, there are some pretty amazing students graduating every year. I also agree with him that having a wide varieties of approaches helps, whether it be home schooling, public, private, technical, etc.

I sat with my advisees today and asked them what they would like to see change in their school experience. Their response...we want more freedom to choose our curriculum and schedule. The more requirements that are added, the less they are able to choose. They are feeling controlled. I asked them to explain. They said the administration and some teachers didn't trust them to make their own choices, and that it was those adults that seemed to fear the mistakes the students might make.

My take...there is a lot of money that rides on test scores (which effects public and private schools) and behavior (which effects admissions primarily private schools, but public as well), and the students feel the pressure of that fear from adults. Just my observation.

Wonder where Yellen went to school?

pinecarr's picture
pinecarr
Status: Diamond Member (Offline)
Joined: Apr 13 2008
Posts: 2215
Excellent, balanced post, HughK!

I was heartened to hear about your positive experiences with the educational system.  But you particularly hit a chord with me with the following:

Also, we are all playing this game in the gordian knot of modern industrial civilization.  Certainly our modern educational system is a part of that and can often - but certainly not as much as some argue - take the joy from life.  But, this is true about a lot of aspects of our modern, compartmentalized world.  I am sure that the indigenous communities and ecosystems whose gold we (yes, us...) are pillaging indirectly by bidding up the price of gold would like us to see the waterfall, the forest, and the earth as a whole.  

I heard a great quote on this recently....you wouldn't sell the Duomo in Florence for its bricks...it's worth a lot more than that as a whole, integrated work.  Yet our system as a whole (and those of us here who buy PMs) are of course selling off parcels of our biosphere in just such a way.  So, sometimes we want to look at things as a whole when it suits us, but we'd like to keep looking at things as discrete and private parcels of property when that suits us as well.

I used to know someone whose work would take him to Indonesia.  I was concerned for his safety because the State Department warned Americans that there was violence and unrest, and that going there wasn't necessarily safe. But the more I read, the more I started to learn that there was more to the story than "bad people causing civil unrest".  https://www.carnegiecouncil.org/publications/archive/dialogue/2_11/section_3/4459.html/:pf_printable

The Amungme and Kamoro are the original indigenous landowners of the areas of Papua that are now occupied by Freeport’s massive copper and gold mining operations. At the time of Freeport’s arrival in 1967, the two communities numbered several thousand people. With lands spanning tropical rainforest, coastal lowlands, glacial mountains, and river valleys, the Kamoro (lowlanders) and Amungme (highlanders) practiced a subsistence economy based on sustainable agriculture, forest products, fishing, and hunting — their cultures intimately entwined with the surrounding landscape.

Today, Freeport’s Papua mining operations are among the largest in the world. The company has decapitated one of Papua’s mountains, held sacred by the Amungme, and dumped millions of tons of mining waste into local river systems. Freeport’s despoliation of Kamoro and Amungme lands and natural resources have brought serious harm to the economies and livelihoods of local communities. Compounding the problem are the hordes of outsiders who have swarmed to the economic “boom town” created by the mine. The area’s population has exploded to some 120,000 people, making Timika the fastest-growing “economic zone” in the entire Indonesian archipelago.

For the Amungme and Kamoro the conflict with Freeport began with the company’s confiscation of their territory. Freeport’s 1967 Contract of Work with the Indonesian government gave Freeport broad powers over the local population and resources, including the right to take land, timber, water, and other natural resources, and to resettle indigenous inhabitants while providing “reasonable compensation” only for dwellings and permanent improvements. Freeport was not required to compensate local communities for the loss of their food gardens, hunting and fishing grounds, drinking water, forest products, sacred sites, and other elements of the natural environment.

   The more I read, the more I was blown away with the total disregard with which the gold and copper mining operations devastated the indigenous people's natural environment.  But what really made it hit home was reading how, in destroying the mountains and rivers, the mining operations were literally defiling what the indigenous people viewed as the embodiment of the sacred "female earth spirits". https://www.carnegiecouncil.org/publications/archive/dialogue/2_11/section_3/4459.html/:pf_printable

This usurpation of indigenous land is particularly harsh in view of Amungme cosmology, which regards the most significant of its female earth spirits, Tu Ni Me Ni, as embodied in the surrounding landscape. Her head is in the mountains, her breasts and womb in the valleys, and the rivers are her milk. To the Amungme, Freeport’s mining activities are killing their mother and polluting the milk on which they depend for sustenance — literally and spiritually. In addition, mountains are the home to which the spirits of Amungme ancestors go following death.”

So yes, I think you bring up a very valid and uncomfortable point, that there are times (like when we buy gold), when wemay  turn a blind eye to the "whole picture".

Time2help's picture
Time2help
Status: Diamond Member (Offline)
Joined: Jun 9 2011
Posts: 2718
BOGUS
Adam Price wrote:

The entire premise of this article is BOGUS and shows a complete lack of understanding of the only 2 interest rates the Federal Reserve controls and how banks determine interest rates they pay on any and all time deposits.

The Federal Reserve CANNOT AND DOES NOT CONTROL INTEREST RATES AT ALL IN THE ECONOMY and only controls the following 2 interest rates which have nothing whatsoever to do with the economy...

You should try yelling LOUDER.

Bankers Slave's picture
Bankers Slave
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Joined: Jul 26 2012
Posts: 513
And why not,

deliberately dumb down Americans? They would be moulded to accept everything that they are told by the PTB as gospel and not to question authority. As far as the biggest lie is concerned, it seems to be working just dandy. It certainly is working over here in old blighty, "The government would never do that to their own people" I hear them say, but the application of that which is missing, logic and reasoning, tells us the opposite is true. 

Big tick in the box for homeschooling from me!

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5441
Incorrect
Adam Price wrote:

The entire premise of this article is BOGUS and shows a complete lack of understanding of the only 2 interest rates the Federal Reserve controls and how banks determine interest rates they pay on any and all time deposits.

The Federal Reserve CANNOT AND DOES NOT CONTROL INTEREST RATES AT ALL IN THE ECONOMY and only controls the following 2 interest rates which have nothing whatsoever to do with the economy:

Assuming you are here to learn and be part of an open-mined discussion, I'll respond.  The Fed directly controls interest rates along the entire Treasury curve and even specifically targeted the long end of the curve with Operation Twist, which saw them swap short paper for long.

And they told us what they were doing and why.  They were driving down interest rates on the long end of the curve with the intent of lowering borrowing costs for long-term purchases, namely houses and corporate investments.

It's not at all reasonable to say that's anything other than controlling interest rates in the real economy.

So there's that.

Next, when the Fed buys a $ trillion in MBS paper, the recipients of all that new cash, by definition, have to do something with that cash.  They could hold onto it, they could store it at the Fed in excess reserves, or they could use it to buy up more financial assets.

To the extent that they used that fresh cash to buy a new debt instrument is the extent to which the prices for those assets rose as a result (and boy did they!) which, of course, drives interest rates lower (and boy did they!) and that's the indirect mechanism for driving rates lower.

But this is all very well known and easy to find out, and I'd invite you to read up on the subject. 

 

davefairtex's picture
davefairtex
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fed controlling rates

adam price-

The Federal Reserve CANNOT AND DOES NOT CONTROL INTEREST RATES AT ALL IN THE ECONOMY and only controls the following 2 interest rates which have nothing whatsoever to do with the economy:

The Fed has demonstrated effective control over short term rates through their QE programs that created a massive pile of Excess Reserves that is constantly seeking a return, which has driven short rates to zero.  Was this their intent?  I think so.   Short rate control: Mission Accomplished.

The Fed's effective control over long rates is more questionable.  They certainly have tried hard (buying 4 trillion in bonds with the stated intention of lowering rates is a decent sign of "trying hard" in my book) to lower rates, but the market seems to flex its muscles every now and then that makes me wonder just how complete their control is over longer rates.

Evidence of the desire to control long rates here:

http://usatoday30.usatoday.com/money/economy/story/2012-06-20/full-text-of-fed-statement/55711168/1

... The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.

So, since explicit policy statements from the Fed itself reveals a desire to control long rates, we can debate whether that policy was successful or not but what is not up for debate is the attempt was made.

 

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robie robinson
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Dave and Chris,

Your patience with the folks here is to be admired. I have too few thumbs with which to congratulate.

 

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Wendy S. Delmater
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FYI the "exec dividend program" ad in Rickard's article?

It's really about warrants, per the Stock Gumshoe.

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Brad
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Permissive teaching practices, and the Gen Yers
gillbilly wrote:

Brad, I remember those days. It was annoying to see everyone get a prize of some sort. Don't know if you're still teaching, but many schools have moved away from that. We all have our limited experience, so I'm only speaking from mine. Some schools are turning out excellent learners, others not so much. I agree with Hugh as well, there are some pretty amazing students graduating every year. I also agree with him that having a wide varieties of approaches helps, whether it be home schooling, public, private, technical, etc.

Hey Gillbilly, I can only speak to what I saw going on in the teacher training arena back in the 90’s, as my career took another path (computer animation) after getting my teaching credential. At that time art and music teachers were being laid off statewide, not hired (as so very many bi-lingual teachers were.) And, within the context of “the dumbing down of education,” one can certainly point a finger at the Feds open border policy, and massive influx of non-English speaking students, which diverted resources away from “higher level cognitive training,” and opportunities for promoting divergent/creative/critical thinking within the curriculum.

Was this all being done purposely back then, in tandem with the thrust towards “humanization” and “moral relativism” in the classroom…in order to “soften the curriculum?’…i.e. “The Naked Communist, goal 17)

I think it’s instructive to compare the spectrum of parenting styles (permissive, authoritative, authoritarian) that we learned about back in Psych 101, to what was then being introduced into the classroom, and then take a look at the generation of graduates that it produced…the Gen Yers.

Here’s a quote from one article: “…impulse control is often difficult for children of permissive parents. This contributes to the behavioral problems that these children tend to demonstrate at school, where their peers tend to outperform them academically. Children of permissive parents also tend to be immature and find it difficult to take responsibility for their actions.”

And from another article: “Harvey’s conclusion? As a group, he says, Gen Yers are characterized by a “very inflated sense of self” that leads to “unrealistic expectations” and, ultimately, “chronic disappointment. And if you think the Gen Yers in your workplace are oversensitive as well as entitled, Harvey’s findings back that up, too. Today’s 20-somethings have an “automatic, knee-jerk reaction to criticism,” he says, and tend to dismiss it. Even if they fail miserably at a job, they still think they’re great at it..”

So, there appears to be some evidence of a causal link between the permissive teaching styles that were being pushed on student teachers in the 90’s with the behaviors and attitudes of the students that subsequently came under their tutelage.

 

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Snydeman
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cmartenson
cmartenson wrote:
melissaoverbrook wrote:

Correct! This is the goal of the US Dept of Education. Check out "

The Deliberate Dumbing Down of America"

While I am not familiar with the work you linked here, the title was very close to the book that got my wife and I to bite the bullet and homeschool our kids.

The book that changed us was Dumbing Us Down: The Hidden Curriculum of Compulsory Schooling, by John Taylor Gotto.

In it he clearly articulates the various regimes and practices of modern public schooling that are designed to create conformity, obedience to authority, and a profound disconnect between and among the various subjects it 'teaches.'

Perhaps the greatest sin is that schools, both public and private quite often ruin a child's curiosity.  As long as you don't do that, they'll be fine.

So we were able to homeschool and we did, and we are now 12 years into that experiment and I could not be happier with the results.

Our kids are curious and engaged and full of hope and life, as they should be.  Everything is related, and interconnected and flat-out magical as long as you remain curious and they have.  There.  That was easy.

Education is *not* about collecting facts, it is about connecting facts.  Well, at least that's what education should be, but all too often is not.

Why would we, as a population, agree to give ourselves substandard educations?  Why would we not revel in the magical mystery tour that life is, as opposed to turning into drudgery at an early age?  Teachers should really not be that at all, but mentors, more like experienced tour guides who know that it is far better to let the travelers round the corner and 'discover' the beautiful waterfall for themselves, than tell them all about it and force them to slice it into meaningless names before seeing it.

If any of you meet my kids (or have as the case may be) you'll see what I mean...they are intelligent human beings...not *kids* or students or children.  And that is the potential birthright of every young human being....as long as they are not taught otherwise along the way.

This right here is why I moved from public to independent school teaching. My wife, who still teaches in the public system, now has to jump through so many flaming hoops and test-preparation strategies that are not only exhausting her, but are sucking from her the LOVE of teaching...which in my opinion is the most important characteristic any teacher can have. For my part, I will leave my profession the moment my passion for it dissipates, and when I feel I can no longer subvert the authority of the powers that be by teaching my kids to make the *connections* of history, and to THINK, rather than to memorize and regurgitate facts. Now, facts are important, don't get me wrong...but they are less important than the connections that can be made between those facts, or the trends and larger movements of history than can be seen from those facts. The problem is that we teachers, like anyone, have mortgages to pay and food to put on the table for our children. We have to follow the "rules" if we wish to remain employed, and when it comes down to the choice between being a dissident and unemployed or being a sheep going along with the system for the sake of making a living, most everyone I know would choose the latter. So, let's be kind with our teachers here...they are as much subjects of the system as anyone else, even though many teachers I know want to go back to an education system that teaches critical thinking. The problem is that teachers - like many professions - are not the ones who are in charge of education, nor educational policy. It's the PhDs and suits who determine it. Sound familiar?

I try my hardest to be a teacher who "flies under the radar" while teaching my kids, as much as possible, to think things through, to never blindly trust authority (even me...I tell them they should feel free to counter anything I say, as long as they have facts and details to back it up), to analyze and interpret, and to look for the history they AREN'T teaching you, rather than the canned shit they are trying to pass off as important. Am I perfect? Not by a long shot. But my first series of lessons on the modern world is where I ask them to use documents and maps to answer the question: "What were the consequences/effects of Columbus's accidental discovery of the "New World"?" On the first station they come across two maps - one from pre-Columbian Americas showing all the major tribal and ethnic groups, and then compare it to the map of the European colonies two hundred years later. Then I ask them to explain what story these maps are telling us. It's HARD for them to think outside the paradigm that Columbus was a hero and that the post-Columbian world was better off for it, but as newbies go they do a damn good job of coming up with the notion that those people are not here anymore, and then they begin to ask why. On my unit test on the Scientific Revolution and Enlightenment, the most important questions I ask them are why was the Enlightenment revolutionary? and How did the scientific revolution change social attitudes about women? (answer: it didn't. It used science to further justify existing patriarchal views) The test finished up with them writing a paragraph explaining what they learned in this unit, why it is relevant (or not) today, and what they "take away" from what they learned. I'd love to try to include some photo examples of student responses embedded in this post, but I'm not proficient enough to figure out how to do that, and I have papers that are crying out to get graded, so I have no time to figure it out.

In my economics course, I am infusing elements of the Crash Course into what I'm teaching, but what may surprise you is how unsurprised the students are by the corruption, unsustainable nature and inherent frailty of the system. They are more observant than we sometimes give them credit for, and smarter too. When I explained how governments issued bonds to cover shortfalls in budgeting, it took maybe 5 seconds before one of them raised her hand and said "But, wait, a debt has to be paid off. So the more debt this generation takes on, the more we will have to pay back in the future, right?" Better yet, when I asked how the budget problems could be fixed, they collectively looked indignant...as if my question was an insult to their intelligence due to its simplicity. 

"We could cut spending."

"We could increase taxes."

Then, the most brilliant response: "We're probably better off doing both. That way we don't have to raise taxes or cut spending as much individually."

I tell you, they're on to us. They know in the depths of their souls that the game is rigged and the party is coming to an end, and they trust us less for lying to them about it. In fact, I consider it the height of my teaching year so far when a student, examining some basic charts, asked if the system was "sustainable," and I responded "I don't think so, but you'll need to draw your own conclusion." Her riposte was, "can we fix it?" and I said, simply, that I didn't know, but I intended to continue trying. For the first time ever, I could see a respect on their faces underneath the fear generated by a teacher acknowledging the bitter truth; a respect that here was an adult who was not going to rose-color things up just to make them feel better. 

When I teach about the Federal Reserve, unlike my partner teacher who will teach all the normal things, I will start them out with a video produced by the FED concerning its role in the economy, then I will show Chris's segment on the Fed. If asked which is the truth, I will not tell them anything other than that they need to look deeper and always ask why anyone in authority might say certain things...and then I'll let their already capable minds lead them. Others might disagree if these approaches are professional of me, of course, and I am walking a dangerous line. Even posting this much about it makes my skin tingle, as if the eyes of my school's administrators might somehow fall on this post and lose me my job. Public school teachers are watched a WHOLE lot more than I am, too.

So, my executive summary is this:

1) Kids are smarter and more observant than we think, and most of them ain't fooled by the hypocritical and dishonest adult world around them.

2) There are teachers out there in the system fighting against common core and the education of obedience. It'd be nice if more voters would help us out on that front, though.

3) The majority of teachers are just trying to make ends meet too. Let's not blame them for this educational train-wreck in progress, please.

4) Despite my own bugle-trumpeting, I'm not the best teacher out there. Trying my best, but that rarely translates into actually doing an excellent job.

 

Snydeman's picture
Snydeman
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Brad wrote: I think it’s
Brad wrote:

I think it’s instructive to compare the spectrum of parenting styles (permissive, authoritative, authoritarian) that we learned about back in Psych 101, to what was then being introduced into the classroom, and then take a look at the generation of graduates that it produced…the Gen Yers.

Here’s a quote from one article: “…impulse control is often difficult for children of permissive parents. This contributes to the behavioral problems that these children tend to demonstrate at school, where their peers tend to outperform them academically. Children of permissive parents also tend to be immature and find it difficult to take responsibility for their actions.”

And from another article: “Harvey’s conclusion? As a group, he says, Gen Yers are characterized by a “very inflated sense of self” that leads to “unrealistic expectations” and, ultimately, “chronic disappointment. And if you think the Gen Yers in your workplace are oversensitive as well as entitled, Harvey’s findings back that up, too. Today’s 20-somethings have an “automatic, knee-jerk reaction to criticism,” he says, and tend to dismiss it. Even if they fail miserably at a job, they still think they’re great at it..”

 

As opposed to the Baby Boomers, and Woodstock generation, who clamored for change on just about every level, but then hypocritically have enjoyed massive and disproportionate prosperity at the expense of later generations? The hippie-turned-yuppies? Yeah, these new generations are just butt-holes.

I'm not arguing they don't display the qualities you are talking about - some of them anyway - but I don't think we should start slinging mud across generations without looking at which generations really screwed the pooch, and which generations are just doing as their parents and grandparents taught them to do. As a generation Xer, I blame my parents, their parents, and my own generation. Apples don't fall far from the trees that bear them, after all.

Honestly I think these current generations are treated with such kid gloves, and hyper-inflated senses of self, precisely because the boomers and Gen-Xers subconsciously feel guilty about screwing over the future so badly with their greed and insatiable need for material wealth.

 

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Brad
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Snydeman wrote: As opposed to
Snydeman wrote:

As opposed to the Baby Boomers, and Woodstock generation, who clamored for change on just about every level, but then hypocritically have enjoyed massive and disproportionate prosperity at the expense of later generations? The hippie-turned-yuppies? Yeah, these new generations are just butt-holes.

I'm not arguing they don't display the qualities you are talking about - some of them anyway - but I don't think we should start slinging mud across generations without looking at which generations really screwed the pooch, and which generations are just doing as their parents and grandparents taught them to do. As a generation Xer, I blame my parents, their parents, and my own generation. Apples don't fall far from the trees that bear them, after all.

Great points!...there are lots of moving pieces to this societal experiment. But, how much of what has happened to bring us to this seeming critical juncture has just been happenstance, and how much has been social engineering? Do you see "the elites fingerprints" upon the long-term trends in public education?  I guess my premise is that there is indeed a nefarious unseen "guiding hand," that's determined to break down both the moral character and the general intelligence of the U.S. population....and that public schooling is one of the more effective tools that they use to this end.

 

 

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Snydeman
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I tend to..

Brad, I tend to stray away from conspiracy theories, and it would take much evidence to prove to me that there has been a deliberate plan and coherent vision coming together by the powers that be to dumb America down. Rather, I see it as a thousand little decisions - some made for nefarious reasons, and others made for noble ones - and the inherent chaos of the system that have led us to where we are today. I blame conservatives and liberals equally, but I don't think it has been planned and executed in any Orwellian way.

But, then again, I'm not too bright, so... ;)

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Adam Price
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Your assertions are false. 

Your assertions are false.  The funds created by QE and used to purchase securities from the banks are NOT SEEKING ANY RETURN AT ALL and are all sitting to the tune of around $3 trillion in the excess reserves accounts of those banks at the Federal Reserve from whom the Federal Reserve purchased the securities.  Those funds in the excess reserves accounts are paid interest at the Federal Funds Rate of 0.25% by the Federal Reserve.

QE has has no impact whatsoever on either long term or short term yields (interest rates) in the bond markets.  Those rates have been pushed to very low levels by VERY HIGH DEMAND FOR US TREASURIES where prices of bonds are inverse to yields.  Demand for those bonds pushes up the prices which in turn lowers the yields.

[Moderator's note: Took the comment out of boldface type.  All-caps and all-bold comments are the equivalent of yelling, and are not allowed on the forums.]

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Adam Price
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Chris, it is obvious you

Chris, it is obvious you simply don't know what you are talking about.  What I stated is completely correct.  The Federal Reserve DOES NOT CONTROL ANY INTEREST RATES WHATSOEVER other than the two interest rates I specified correct which are:

1) Federal Discount Rate - currently 0.75%

2) Federal Funds Rate (which it influences) - currently 0.25%

Both rates are only for VERY SHORT TERM LIQUIDITY PURPOSES AND APPLY ONLY TO BANK BORROWING, with the Federal Discount rate being for direct borrowing by banks from the Federal Discount Window at the Federal Reserve and the Federal Funds rate being for interbank borrowing.

The only 2 rates set by the Federal Reserve have absolutely nothing to do with the interest rates that banks pay on savings account, other than to "influence" the banks to perhaps pay higher or lower rates on those accounts.

The Federal Reserve HAS NO CONTROL WHATSOEVER ON YIELDS ON US TREASURIES and can only influence those in a limited way by jawboning and by increasing or lowering demand for them by buying or selling US Treasuries.  The Federal Reserve holds less than 15% of all outstanding US Treasuries.  The annual market for US Treasuries is around $9 trillion in newly issued US Treasuries from the US Treasury and the Federal Reserve only buys about 8% of these, mostly to replace matured US Treasuries which have been paid off in full to the Federal Reserve by the US Treasury.  The Federal Reserve is essentially a RELATIVELY MINOR PLAYER in the overall market for US Treasuries with about 92% of all US Treasuries each year purchased by parties other than the Federal Reserve.  Do you not comprehend that?  If not, I would suggest you review US Treasuries at:

http://www.TreasuryDirect.gov

As to cash proceeds from QE, ALL OF THOSE PROCEEDS TO THE BANKS TO THE TUNE OF AROUND $3 TRILLION HAVE GONE DIRECTLY INTO THEIR EXCESS RESERVES ACCOUNTS AT THE FEDERAL RESERVE which is where those funds are sitting and have been sitting so there is obviously nothing else to do with those funds as you either ignorantly or naively assert.

EXCESS RESERVES ACCOUNTS OF BANKS TOP $2.5 TRILLION - WSJ

So what exactly are excess reserves, and why should you care? Like most central banks, the Fed requires banks to hold reserves—mainly deposits in their "checking accounts" at the Fed—against transactions deposits. Any reserves held over and above these requirements are called excess reserves.

Not long ago—say, until Lehman Brothers failed in September 2008—banks held virtually no excess reserves because idle cash earned them nothing. But today they hold a whopping $2.5 trillion in excess reserves, on which the Fed pays them an interest rate of 25 basis points—for an annual total of about $6.25 billion. That 25 basis points, what the Fed calls the IOER (interest on excess reserves), is the issue.

http://online.wsj.com/news/articles/SB1000142405270230399760457923840317...
 

[Moderator's note: Removed boldface type.]

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Snydeman
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Wow, really?
Adam Price wrote:

Chris, it is obvious you simply don't know what you are talking about.  What I stated is completely correct.  The Federal Reserve DOES NOT CONTROL ANY INTEREST RATES WHATSOEVER other than the two interest rates I specified correct which are:

1) Federal Discount Rate - currently 0.75%

2) Federal Funds Rate (which it influences) - currently 0.25%

Both rates are only for VERY SHORT TERM LIQUIDITY PURPOSES AND APPLY ONLY TO BANK BORROWING, with the Federal Discount rate being for direct borrowing by banks from the Federal Discount Window at the Federal Reserve and the Federal Funds rate being for interbank borrowing.

The only 2 rates set by the Federal Reserve have absolutely nothing to do with the interest rates that banks pay on savings account, other than to "influence" the banks to perhaps pay higher or lower rates on those accounts.

The Federal Reserve HAS NO CONTROL WHATSOEVER ON YIELDS ON US TREASURIES and can only influence those in a limited way by jawboning and by increasing or lowering demand for them by buying or selling US Treasuries.  The Federal Reserve holds less than 15% of all outstanding US Treasuries.  The annual market for US Treasuries is around $9 trillion in newly issued US Treasuries from the US Treasury and the Federal Reserve only buys about 8% of these, mostly to replace matured US Treasuries which have been paid off in full to the Federal Reserve by the US Treasury.  The Federal Reserve is essentially a RELATIVELY MINOR PLAYER in the overall market for US Treasuries with about 92% of all US Treasuries each year purchased by parties other than the Federal Reserve.  Do you not comprehend that?  If not, I would suggest you review US Treasuries at:

http://www.TreasuryDirect.gov

As to cash proceeds from QE, ALL OF THOSE PROCEEDS TO THE BANKS TO THE TUNE OF AROUND $3 TRILLION HAVE GONE DIRECTLY INTO THEIR EXCESS RESERVES ACCOUNTS AT THE FEDERAL RESERVE which is where those funds are sitting and have been sitting so there is obviously nothing else to do with those funds as you either ignorantly or naively assert.

EXCESS RESERVES ACCOUNTS OF BANKS TOP $2.5 TRILLION - WSJ

So what exactly are excess reserves, and why should you care? Like most central banks, the Fed requires banks to hold reserves—mainly deposits in their "checking accounts" at the Fed—against transactions deposits. Any reserves held over and above these requirements are called excess reserves.

Not long ago—say, until Lehman Brothers failed in September 2008—banks held virtually no excess reserves because idle cash earned them nothing. But today they hold a whopping $2.5 trillion in excess reserves, on which the Fed pays them an interest rate of 25 basis points—for an annual total of about $6.25 billion. That 25 basis points, what the Fed calls the IOER (interest on excess reserves), is the issue.

http://online.wsj.com/news/articles/SB1000142405270230399760457923840317...
 

Let's see...you've called Chris ignorant, naiive, and stupid. Pray tell, how many multi-hour presentations have you done where you lay out a very data-driven and economically sound argument for why our financial system, energy system, and environment are all headed for crises? Published numerous articles on all sorts of economic trends and issues? What are your credentials again? I may not always agree with Chris on some finer points, but you're calling him stupid in the field he knows a hell of a lot about, so you might want to; a) give some respect in your tone, which right now resembles an adolescent who is pissed his Dad won't let him go to the party where all the girls are hanging out, and b) bring to the table some data and logic and engage him on his points directly. Oh, and don't quote the Wall Street Journal without back-checking their data. Posting things from the mainstream media here, and acting as if they are gospel, will get you as far as Paris Hilton will get, naked, in a gay bar.

Try refuting his points without resorting to name calling. It might make your argument more convincing.

Adam Price's picture
Adam Price
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Federal Reserve has nothing to do with interest paid to savers

THE FEDERAL RESERVE HAS NOTHING WHATSOEVER TO DO WITH INTEREST RATES PAID BY BANKS OR MONEY MARKET FUNDS TO SAVERS WITH TIME DEPOSITS.  Nothing, nada, zip, zilch, nil.

The Federal Reserve CANNOT AND DOES NOT CONTROL INTEREST RATES AT ALL IN THE ECONOMY and only controls the following 2 interest rates which have nothing whatsoever to do with the economy:

1) Federal Discount Rate - currently 0.75%

2) Federal Funds Rate (which it influences) - currently 0.25%

Both rates are only for VERY SHORT TERM LIQUIDITY PURPOSES AND APPLY ONLY TO BANK BORROWING, with the Federal Discount rate being for direct borrowing by banks from the Federal Discount Window at the Federal Reserve and the Federal Funds rate being for interbank borrowing.

The only 2 rates set by the Federal Reserve have absolutely nothing to do with the interest rates that banks pay on savings account, other than to "influence" the banks to perhaps pay higher or lower rates on those accounts.

There is no minimum amount that was ever coded into regulations that banks have to pay on a savings account, although there were once maximums with Regulation Q which was part of the Glass Steagall Act and those were 5.25% for banks and 5.50% for thrifts (savings and loans).

Banks USED TO GENERALLY FOLLOW the Federal Discount Rate in terms of what they would pay savers as recently as 2007, but that was before they discovered that they could pay savers 0.000000000000000000001% and not have any significant loss of deposits.

As long as banks have LOW DEMAND FOR BORROWING against depositor funds, the chance of banks "competing" with other banks to pay higher rates to attract funds (which used to include FREE TOASTERS, etc. along with bonus interest rates for a period of time) is nada, zip, zilch, and nil.
 

[Moderator's note: This is a repeat post. Not allowed.]

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Adam Price
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Try refuting a single one of my points

Snyderman, you apparently don't comprehend the facts related to the Federal Reserve and interest rates, either.  I'd suggest you read and attempt to comprehend exactly what I stated and further review the information available at:

http://www.FederalReserve.gov

http://www.TreasuryDirect.gov

You haven't managed to refute a single point that I made and are just acting as an apologist for Chris and his delusional and dead wrong assertions.

[Moderator's note: At this point it is difficult to tell whether your animosity is serious, or whether you are simply having fun being a troll.  I think you will find that the crowd at PP.com is a bit too mature and level-headed to be easily goaded into shouting back at you.]

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A. M.
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Dialog vs Trolling for arguments

Adam Price,

You've  decided to challenge the presented work - it is therefor incumbent on you to display the data disproving the assertions made. The scientific method can steer all fact based dialog to a refined understanding. Provided you have the facts, you present them to support your claim.

You have given nothing to refute except links. Present the code or law that dictates the responsible party for interest rate laws and how they work, or accept the work as presented. That is how it works, and you'll find:

a. the attitude is entirely unnecessary here, and;

b. It won't get you very far.

Cheers,

Aaron

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Time2help
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Darbikrash, is that you?

It would seem that he's the Darbikrash of modern economic theory.

no

Mr. Price - Whatever they are paying you, it's too much.

davefairtex's picture
davefairtex
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proof by repeated assertion

Mr Price has decided to utilize the "proof by repeated assertion" technique.  I'm not impressed.  He's a troll.  End of story.  I suggest: ignore him and hopefully he'll just go away.

 

[Moderator's note: A.M., time2help, davefairtex, and Snydeman, thank you for putting the maturity and level-headedness of our community on fine display.  Adam Price will be taking a vacation from the forums now.]

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cmartenson
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The importance of using facts correctly
Adam Price wrote:

Your assertions are false. T he funds created by QE and used to purchase securities from the banks are NOT SEEKING ANY RETURN AT ALL and are all sitting to the tune of around $3 trillion in the excess reserves accounts of those banks at the Federal Reserve from whom the Federal Reserve purchased the securities.  Those funds in the excess reserves accounts are paid interest at the Federal Funds Rate of 0.25% by the Federal Reserve.

Adam, here's the thing about this site.  We use facts.  

To just cite one example, out of many, that I could pursue to demonstrate where your thinking is leading you astray, I'll use the bolded text above about excess reserves as a starting point.

If the facts that underlie the bolded parts are wrong we can save a LOT of time by not bothering to refute or attempt to counter the assertions built off of them, because they will be, by definition, flawed.

Make sense?

OK, so your main claim above is that all the funds created by QE are sitting in excess reserves and therefore cannot be out there influencing interest rates.  If true that's a pretty good starting point for the rest of your arguments.

Luckily, the data we need to verify that claim is easily accessible with a few mouse clicks

From the Federal Reserve we find these data points.

  • Fed balance sheet on Sept 1, 2009 before the crisis hits = $895 billion.
  • Fed balance sheet today = $4,461.6 billion
  • Difference between the two = $3,566.6 billion (this is the total amount of Fed QE balance sheet additions)
  • Total excess reserves today = $2,667 billion
  • The difference between excess reserves and Fed QE additions  = $899.6 billion

Thus, rounding up slightly, the amount of money out there influencing things like interest rates is $900 billion, which is more than the entire size of the Fed balance sheet before the crisis hit.

Your primary claim is that the injection of some $900 billion into the US financial system did not influence interest rates in any meaningful way, even though this amount was larger than the entire size of the pre-existing Fed balance sheet that had been accumulated through nearly 100 years of careful monetary policy execution.

That's not a reasonable claim, at all, ergo any assertions built off of that are potentially even more unreasonable.

As you've already noted, hopefully, we are allergic to unfounded assertions around here.

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Jim H
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Fed balance sheet: The gift that keeps on giving

This caught my eye this morning;

http://www.bloomberg.com/news/2014-10-24/fed-s-4-trillion-holdings-keep-...

As the Federal Reserve prepares to end its third round of bond buying next week, the central bank plans to hang on to the record $4.48 trillion balance sheet it has accumulated since announcing the first round of purchases in November 2008. ............

Chair Janet Yellen opened the door to keeping a multi-trillion-dollar portfolio for years, saying a decision on when to stop reinvesting maturing bonds depends on financial conditions and the economic outlook. Shrinking the balance sheet to normal historical levels “could take to the end of the decade,” Yellen said at her press conference last month.

This is a very, very simple point.. but I think it is lost on most folks.  The balance sheet becomes a self-perpetuating source for ongoing QE.. in other words.. just because the FED has stopped printing money..  does not mean that the distortion to the bond market, and the resulting rate manipulation across the maturity spectrum (This one's for you Adam!) will end.  Now I guess this balance sheet income amounts to sterilized QE, in other words not amounting to newly printed money... but it's still distortive, obfuscating the true supply vs. demand picture for US debt.   

Think of it this way - if the FED merely allowed for the balance sheet to wind down via the self-liquidating (they get paid off) nature of bonds, it would be pretty painless, because they would not be "selling" per se.. just not replacing.  But they can't, or won't even do that.  I suppose someone could take the balance sheet data and approximate the level of stimulus we are talking about... but let's just say that 10% of the balance sheet liquidates yearly, that's $448 B, or $37 B monthly.  Any way you slice it, we are talking real money.  Still think the economy is getting better?      

 

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Adam Price vs. the FED

Here we go;

Adam said,

THE FEDERAL RESERVE HAS NOTHING WHATSOEVER TO DO WITH INTEREST RATES PAID BY BANKS OR MONEY MARKET FUNDS TO SAVERS WITH TIME DEPOSITS.  Nothing, nada, zip, zilch, nil.

The Federal Reserve CANNOT AND DOES NOT CONTROL INTEREST RATES AT ALL IN THE ECONOMY

San Fran FED President John Williams said,

San Francisco Fed President John Williams, who also supports ending QE, said in a presentation in Washington earlier this year that research shows purchases have “sizable effects” on lowering bond yields, though uncertainty remains about the magnitude of these effects and their impact on the overall economy. He cited several research papers showing QE2 lowered yields on the 10-year Treasury note by around 15 to 25 basis points.

Since all interest rates, both paid and earned, key off of UST bond yields, I would say that the FED itself has invalidated Adam's trollish argument.  I will stop now   : )

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Well done Snydeman

Great points Snydeman. I also work in a private school now, but taught for years in public schools and universities.

The problem is that teachers - like many professions - are not the ones who are in charge of education, nor educational policy. It's the PhDs and suits who determine it. Sound familiar?

Administrations originally were beneath the faculty in the hierarchy, but since they worked 12 months out of the year, they were eventually paid more, and then "paid more" eventually meant "more important."

The policies and curriculums are being dictated from the top down. Look no further than Silicon Valley, which dictates to the government, which in turn tells the universities and so on down the line. Let's take the IPad/BYOD initiatives in public school that puts tablets in every kids hands. I can tell you these devices are not all they're cracked up to be. They distract the kids and the interface is pretty awful for education (can't type on them, difficult to use e-texts and to take notes). Some apps are okay, but even in private schools we're being told by the administration that we have to use them in our classes (literally, they ask us to send them a list of apps that you are using...heaven forbid we don't use any). What's interesting is there really isn't anyone under the age of 25-30 who grew up using these devices in the classroom, so we really don't know how they effect learning and the classroom environment, but you'd be hard-pressed to find a school that isn't racing to the finish line to outfit every student with a tablet. I can't tell you how many faculty meetings have been taken up with discussing what to do about students abusing their tablet in class (shopping, facebook, twitter, email, etc). Furthermore, we are now seeing seniors in high school that have trouble spelling simple words because they have been using a computer with spell check to write their papers for years.

I agree with you as well about conspiracy, it would take a lot of evidence to convince me. Whether you call it dumbing down or narrowing, I think it lies in the millions of little "logical" decisions made over the years, and that creates an inertia that takes on a life of its own.

Love your executive summary points!

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gillbilly wrote: The policies
gillbilly wrote:

The policies and curriculums are being dictated from the top down. Look no further than Silicon Valley, which dictates to the government, which in turn tells the universities and so on down the line. Let's take the IPad/BYOD initiatives in public school that puts tablets in every kids hands. I can tell you these devices are not all they're cracked up to be. They distract the kids and the interface is pretty awful for education (can't type on them, difficult to use e-texts and to take notes). Some apps are okay, but even in private schools we're being told by the administration that we have to use them in our classes (literally, they ask us to send them a list of apps that you are using...heaven forbid we don't use any). What's interesting is there really isn't anyone under the age of 25-30 who grew up using these devices in the classroom, so we really don't know how they effect learning and the classroom environment, but you'd be hard-pressed to find a school that isn't racing to the finish line to outfit every student with a tablet. I can't tell you how many faculty meetings have been taken up with discussing what to do about students abusing their tablet in class (shopping, facebook, twitter, email, etc). Furthermore, we are now seeing seniors in high school that have trouble spelling simple words because they have been using a computer with spell check to write their papers for years.

Oh good lord, don't get me started on the role of technology in the classroom! Our school started integrating required computer tablets 7 years ago for all students, and teachers were hard-pressed to figure out how to make technological education "innovative" (an overused and overvalued word, in my opinion). After three years, most teachers were still teaching the same way, but a few of us were seriously trying to utilize the technology to make learning more fun, efficient, and relevant. In my fourth year I piloted a program using Microsoft's OneNote program, where I toggled server permissions and sharing functions in such as way as to enable a digital class notebook, where I could drop notes, pictures, outlines, anything into an organized notebook that would almost instantly sync to student tablets. Students could also do their homework in a personal notebook which would sync with my own tablet, so handing in work was as simply as starting up your computer.

The great thing was that they could do group or individual work anywhere on campus and I could see what they were doing in real-time, correct any misunderstandings or problems, offer feedback, etc, in real-time! A great example was I had some students looking up the Roman religious system, and they were sitting down the hall on the floor, stretched out, doing their research. When they started listing out the GREEK names of gods, I circled the names with my tablet pen and wrote "these are the Greek gods. Look for the Roman equivalent!" I heard a squeal from the group a few seconds later, and then watched a few minutes after that as they updated the list. It was a truly "innovative" use of technology- that is, it supported or enhanced the learning. Most technology interferes, disturbs, or complicates learning, in my experience.

The punch-line of my story is that the following year my school went to a one-to-one computer policy, where students could bring in ANY computer (Apples, PCs, Tablets), and since there was no longer a required suite of programs the students had to use, my school stopped paying for MS OneNote, and students did too. SOOOOO much work, down the tubes. I'm not bitter.

Ok, just a little.

My favorite "innovation," by the way, was something called back-channeling, where students would participate in a chat room with one another and the teacher, answering questions and 'digging deeper' into the content of a film or documentary as they were watching it. Yes, they were expected to watch their computer screens, think deeply, and actively watch the movie at the same time. Beyond the ludicrous nature of this, it goes against all the brain research I've ever seen, not only on teenagers but on adults as well; we simply can not focus 100% on multiple things at once, especially if the tasks encompass similar modalities. So watching a screen and watching a screen simultaneously just aren't really possible without losing a lot in transition. Then again, had anyone asked an experienced teacher I'm pretty sure we could have saved them a lot of research money and told them it was a stupid idea.

Back-channeling now lies six feet under the soil in the cemetery of stupid pedagogical ideas generated by people with too little classroom experience and too much so-called education. May it rest in peace, and not come back as a zombie, as so many stupid pedagogical ideas seem to do.

 

In any case, after 7 years using tech in the classroom, I've learned the following:

-Kids hate reading anything online that is of any substantial length. They need to feel the paper in their hands, to annotate it, to see it in context, and to physically manipulate it.

-Computer technology in and of itself does not revolutionize education, anymore than the TV did for my generation. Kids are excited to use technology for what they want to use it for....not for what WE want them to use it for. Videotaping a boring lecture and posting the video online for students to trudge through doesn't make it any less a lecture nor any less boring. By comparison, during my unit on World War One, I have students go to a website and participate in a choose-your-own-path game that puts them in command of a British regiment in the trenches and asks them to make hard decisions and see the consequences play out on the screen. They never forget the lesson.

-If given the choice, kids won't even open their tablets. They don't choose to take notes on them, they don't choose to do research with them, and they certainly don't want to be forced to read on them.

-Technology fails, falters, hiccups, and can be hacked. I have yet to see any student have a picture they draw in their notebook get hacked and posted online. The server on a notebook never goes down. Opening up the notebook is only as slow as the person opening it. I've had ALL of these things happen regularly when using tech in my room. Usually, of course, these things fail when I really need them to work...so I've learned not to lean on technology overly much.

-All this technology is fine during an era of still-cheap energy, but where will we be in five or ten years time, when energy and resource costs have likely spiraled out of control? For all the talk administrators and education PhDs have about the "future of education," precious few of them seem to pay enough attention to the likely outlook of the future. Then again, maybe I'm wrong and we're going to be just fine, but I doubt it.

I'm sure I'm missing something, but trust me...I feel your pain!

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climber99
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All debts get repaid;

All debts get repaid; somehow.

95% or so of 'money' is created by banks as debt (plus any services and assets that banks purchase). This money circulates and eventually comes back to the banks as principal and interest repayments to be destroyed.

Savings is just 'money' that is in circulation but stationary at the moment. i.e. waiting to be spent and circulated again.

The central banks are lenders of last resort. Debt default cascades down to the central banks who, in practice, simply rolled over the debt.  Providing enough new debt is issued to repay older debts and interest, the show continues to roll.  If not enough new debt is issued (like in Greece), then savings and existing assets get liquidated i.e. gold reserves get taken, National assets gets privatised, individual savings account get raided. 

May I add, that this is the financial system we have now, i.e. based on debt, but there are many others ways that 'money' in circulation could be created, which may or may not be more suited to an age of declining Net energy production.  A topic for future discussion perhaps.

Ed

 

 

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Just to follow on from my

Just to follow on from my last comment.

You are correct that it is unfair that borrowers can default (or pass the debt burden onto someone else, to be exact) and suffer no personal consequences; and then for tax payers and for savers to ultimately end up paying this debt off.  The lenders of last resort have largely avoided this from happening by increasing the National debt.

Those people calling on governments to reduce their debts levels should be careful what they wish for. If debts cannot be rolled over then savings and existing assets must be used to pay the principal and interest on existing debts. 

Ed

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Only if the banks are allowed

Only if the banks are allowed to.

Karl Denninger has the answer to this with 'One Dollar of Capital': Banks should not be allowed to lend more than the value of all their assets. Then anyone defaulting on their loans will mean the bank shareholders losing their own money, not other people's. This should make banks far more cautious about who they lend to, and eliminate the growth of asset bubbles.

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http://www.conventionofstates

http://www.conventionofstates.com/

 

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Sterilized - well remembered

You are one of the few who can remember the term 'sterilized' QE, Jim.  At the start of QE in 2008 or whenever, the FED made the very important point that QE was 'sterilized'.  For those who don't understand the term, it means that QE can be reversed.  It was still 'money' born out of debt and you can reverse QE just by selling the treasuries, mortgage backed securities or whatever and pay back the debt. Reserving QE  i.e. QE is NOT debt free money printing. Remember, 95% of our money supply is created through debt and QE is no different.

Your point; is QE distortive?  Probably, but they are desperate to keep the World growing.  My point has always been;  is World growth approaching it's limits anyway and if so, how can QE be reversed and can our current system of money creation survive.

I have a hunch that we will need some form of debt free money creation at some point in the future so as to wipe out some of the debt which will unfortunately also wipe out an equal amount of savings. It's not going to be very popular !!!

Ed 

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Perhaps

Sounds good but how would you expand and contract the money supply? Without control of the money supply you have no control over inflation/deflation.  Does it matter if you do not have control of these? I don't know, is the short answer.

Ed

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monetary thought experiments...

Climber said,

I have a hunch that we will need some form of debt free money creation at some point in the future

I think you are right, it's just a matter of whether the monetary powers that be get their act together and come up with their own solutions before we the people completely repudiate their debt-based, ever more digital fiat money in a wave of hyperinflationary revulsion.  Many commentators, including myself, believe that the free market has already presented us with an alternative currency with many benefits - namely Bitcoin... but I don't want to turn this into a Bitcoin thread.  

Following your lead, I have thought about the flaws in the current system and come up with my own version of a fix.  The main root problem, in my opinion, is the fact that a pure debt-money system creates the principle, but not the interest to pay off the loans.  (Much abuse layers over this flaw in terms of the power of central banks, the collusion of central banks and governments, etc... and this would need to be addressed as well - but for now I am just addressing the core flaw).  In this way, debt always runs away from the total money in the system, which creates the imperative for inflation.  The imperative for inflation is therefore based on nothing but a technical, or dynamic flaw in the money creation system.  How might this be fixed? 

Here is my thought experiment - it is a hybrid system;  Calculate the total amount of money owed as interest, on a regular basis (say quarterly), for all newly created debt money in the system... all mortgages, car loans, school loans, and gov't borrowing (if QE serviced).  Then create this amount of money debt-free and distribute it equally to all families and/or individual tax payers in the US.  Very, very simple in concept. What would be the outcomes?

1)  There would be more money in the system, which would reduce the need for the monetary authorities to induce inflation through other means - means that often tip the system in favor of banks and the already wealthy. 

2)  While generally inflationary, this plan would aim the benefits at those who usually get hurt the most by inflation - the poor and middle class.  They would get first access to the newly created money, and since all parties would get equal amounts, on a per income % basis the poor would benefit most.  

3)  Payouts would scale to the amount of underlying debt creation.. meaning that the creation of debt free money would scale roughly with underlying growth.  

4)  Over time, the amount of debt-free, non-self liquidating money would build up in the system as a % if total debt, creating a bigger and bigger buffer against the short term deflationary tendencies of the business cycle downside.  This should allow for central banks to leave the free markets more to themselves and reduce the need to blow sequential bubbles.

5)  As interest rates normalize, the pain of increased borrowing costs to a regular person who needs a car loan or a new mortgage is reduced.. because their, "debt money system benefit payout" would increase... remember, the payout is sized to fill the gap between the principle and total owed (principle + interest)... higher interest means higher payouts of debt-free money.  

Of course, much of this would never happen because it would turn so many of the benefits that are today in the hands of the banks and the wealthy back to the common folk... but it's at least interesting to think about how simple it could be to fix the core problem with debt-based money.     

                     

   

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Thanks Jim, but

I think that the FED and other central banks round the world are thinking about how they are going to unwind the huge debt mountain and unfunded future liabilities they have when World growth peaks and then starts its decline, just like you have done.

However, I'm going to make make myself very unpopular with you for which I'm very sorry. There is a very common misconception in the blogosphere that 'interest' money is not created before hand and hence creating the need for debt to ever increase in order to cover it. This is what really happens.

Money is created by a bank whenever a loan is made AND whenever the bank buys services (including wages for staff, dividend payments etc) or assets (like investments on behalf of the bank).  If the money supply is being kept constant, then this amount will equal the loans being repaid and interest payments..  (Central banks set interest rates to alter this balance to fine tune the money supply)

Ed

 

 

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fractional reserve money creation...

Ed,  You will never be unpopular with me for sincere discussion... insincere and/or trollish behavior, especially when it supports the cause of paperbugs, will cause me to come out swinging though, as many here know.  Anyway, you said,

Money is created by a bank whenever a loan is made AND whenever the bank buys services (including wages for staff, dividend payments etc) or assets (like investments on behalf of the bank).

Can you please find some references for this feature of banking?  I don't think these actions on the part of a bank actually, in and of themselves, lead to more money creation.  I have though seen the argument before that bank wages, for instance, may account for some of the debt based money that would otherwise have been destroyed not being destroyed.  Nevertheless, It is demonstrable that in most Western debt-based fiat systems, total debt runs away from total money.  That's what this guy (who himself is naive regarding the way banks create money) found when he looked into it, noting that a debt-to-money ratio > 1.0 supports my point;

  http://simonthorpesideas.blogspot.com/2013/04/total-global-debt-and-mone...

DebtMoneySupplyRatio.png

How do you explain this?  What am I missing?  

I will end with a quote;

 

“That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.”

Marriner S. Eccles, Chairman and Governor of the Federal Reserve Board

http://en.wikipedia.org/wiki/Marriner_Stoddard_Eccles

http://minneapolisfed.org/pubs/region/99-06/martin.cfm

 

 

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Hi Jim. Thank you for your

Hi Jim. Thank you for your kind words.  I too believed what you do now.  However I did a lot of reading around the topic a few years back and bought a copy of this www.neweconomics.org/publications/entry/where-does-money-come-from

It goes into a lot of depth on the topic of money creation including debunking the 'interest money is not created' myth

As regards your second point as to why debt is greater than money supply, I wrote some tentative theories in the comments section of www.peakprosperity.com/blog/87874/national-failure-save-invest-crash-course-chapter-16 They are only tentative at the moment.

Ed

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Here Here

Absolutely correct CM.  I've known about financial repression for 15 years.  When they first "invented" superannuation in Australia (like a 401k) and I sat down with a calculator and worked out that my retirement benefit after inflation was going to be the equivalent of one year of current annual salary which in those days was already pretty ordinary.   That superannuation and 401k are just giant tax revenue engines didn't occur to me until more recently.

Meanwhile people rush to put extra money into their super (401k) and use it as a kind of tax dodge because the tax on contributions is lower than capital gains taxes - and lose cash flow to do it.  They all get swayed by six figure retirement figures 30 years hence and think they are doing ok. 

What surprises me of course is that everyone buys into it.  Even people you think are intelligent, people who hold degrees in engineering and science.  I guess it demonstrates that fiscal awareness is something independent of mathematical genius.

Perhaps labeling the crime with the words "financial repression" is key to getting people aware.  They don't have to understand what it means just that it is bad and being practiced by the FED, IMF and governments and that it is tantamount to stealing from the non-rich.   Like GMO - no-one actually knows what it means and yet no-one will eat food containing GMOs.  Financial repression or better yet "financial oppression" needs to become a household term that everyone starts talking about.

Until people figure out that they are victims I fear the middle classes will just chug along getting poorer until the USD hegemony breaks and financial collapse happens. 

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A very detailed discussion of the no shortage theory here...

Thus, according to this analysis, the source of the perpetual growth imperative can be attributed to two factors that prevent 100% recycling of principal and interest, namely...
using interest income to increase the pool of principal and secondary lending itself.

Defenders of the "no shortage theory" argue that there can never be a shortage because the "flow" can be speeded up. We just need to work harder to pay the extra charges. But "speeding up the flow" means increasing earning and spending Ie. Gross Domestic Product, economic growth.

This just proves what I claimed in the movie... that a structural money shortage necessitates constant expansion of the real economy. With this argument, my critics prove me correct.

http://paulgrignon.netfirms.com/MoneyasDebt/disputed_information.html

I remain convinced that the growth, or inflation imperative is embedded into the system based on the fact that the money to pay interest, for the most part, does not exist in the system.  

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stocks and flows

The exponential growth in money is definitely there, but it is not there because of "not having enough money in the system to pay the interest."

Two examples:

A wage slave makes $36k/year, is paid monthly, and spends his entire salary each month.  How much money supply is required from the system to provide "economic lubrication" for his annual salary?  Is it $36k?  No.  Since he is paid monthly, he only needs $3k total from the system, since he only ever sees $3k at a time.  That's an example of a "36k annual flow" requiring only a $3k total money supply - $3k is the stock, while $36k/annual is the flow.

Let's look at another loan.  How much money do I need to have to make my monthly payment on my $1M loan @ 5%.  Each year, I owe $50k.  Do I need to have $50k in the bank to make each monthly payment?  No.  I just need $4166, every month.  And in fact as long as I make $4166 each month, I can make my payment even though on a yearly basis I really do need $50k.  And the system itself needs only provide me with $4166 as my share of "aggregate money supply" to support my debt of $1M.

Loan is $1M, flow required is $50k, but money stock required to make my payment is only $4166.  And if interest payments are recycled, that $4166 can circulate indefinitely - and as long as $4166 of value is added monthly to the economy by the debtor, he has no problem in making his payments without any more money being created.

Suggesting that the system must have enough "money supply" in the system so that every debtor is able to make their entire annual interest payment at any given moment is just absurd.  The "system" doesn't need this, any more than individual debtors need to have their annual aggregate interest payments sitting in their banks in order for them to be able to make their payments.  Its just not how things really work.

Again, its a stocks & flows thing.  All debtors need is enough "flow" to make the payments.  And the "stock" doesn't need to equal the "flow" for it all to work out.

The whole thing about "working harder" is a non sequitur.  Monthly payments is how the magic trick works.  If all interest payments were annual - if you really had to have $50k to make your 5% payment on the $1M loan, and you were required to pay it all once per year, then there might really be a problem.

But of course that's not how things really work so - no problem.

 

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I think that we can agree

I think that we can agree that there is some sort of 'growth imperative' in action. The exact mechanism behind this will be debated, am sure, between us during the coming years here on Peak Prosperity. 

As World GDP growth slows, peaks and then starts to decline, the interaction between this and our monetary system is going to be very interesting.

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This has all been hashed out before....

Dave, I know you are sold on the Steve Keen model that says things can work out based on a certain set of behaviors as programmed into a stock-to-flow model he has.  Here is what one Chris Martenson wrote back in June; 

http://www.peakprosperity.com/comment/167806#comment-167806

Steve Keene is being a complete egghead on this one, by which I mean utterly divorced from simple real-world realities.

I agree with the highly simplified and utterly unrealistic set up which has all flows of money coming back into the bank and then flowing back out into the world, perfectly balanced with all stocks, and no accumulations of said stocks at any particular points.

Under those conditions of idealized and perfect stocks and flows it's theoretically possible to make it all balance out.

However, out there in the real world, where there's $57 trillion in debt, it's impossible to have all $2 trillion in debt remittances flow into the bank and back out as wages in a manner that prevents exponential growth in the money system.

By way of evidence I have charts of both debt and money spanning many decades with near perfect exponential growth.  R^2 of 0.99, baby!

So what does it matter if it's theoretically possible under heavily constrained conditions in a stripped down spreadsheet to make stocks and flows balance for a couple of turns of the crank?  Stocks and flows are never ideal or perfect and, because of this, you get the exponential behavior we see in the real world.

In this particular argument, I agree with Chris.  Left to it's own devices, our monetary system is dynamically unstable in that total debt tends to run away from total money.  This is quite obviously a feature of the system given that the money creation mechanism creates the principle, but not the interest.

The new "argument:" you give above, that monthly payments are somehow the key to understanding your point... makes no intuitive sense to me.  As an engineer, looking at the money system as a whole, the relative "lumpiness" of the payment stream would seem to make little difference.  Sure, from a personal affordability standpoint, and given human nature.. it is important.  But, from a system stability vs. instability point... and I am arguing that the debt based money system is prone to instability, whether payments are made weekly, monthly, or yearly, would make little difference when viewed in aggregate.  Total payments would be about the same on a yearly basis whether paid monthly or yearly, and over many loans the dates of these (much larger, much lumpier) yearly payments would amount to exactly the same hill of beans.  

As I have shown in a post above, total debt in Western money systems tends to outpace total money by about 2X.  I suggest this is because total debt = total principle + total interest, and the interest portion of this equation is never explicitly created. 

A specific case as food for thought;

As one digests this particular dynamic of our money system, it occurs to me that the system could get into trouble especially during the latter half of a housing boom.  Since housing debt. is the bulk of our total consumer debt, it really wags the dog when it comes to the dynamics we are talking about.  As of this Nov. '13 report, mortgages accounted for 70% of our total indebtedness;

       http://www.newyorkfed.org/householdcredit/2013-Q3/HHDC_2013Q3.pdf

What do we know about mortgage loans?  Well, for one, they are big, creating a LOT of money all at once.  Two;  They are long lived, most of the time 30 years in length.  Thirdly, they are highly front loaded in terms of interest payments... the payoff of principle being back loaded.

Because of these three dynamics, we can imagine the following;  Since mortgages are so long-lived - the interest compounds for so long, the amount of interest is very high relative to the initial loan amount.  

For example, a $100,000 mortgage at 5.75 percent paid for 30 years will actually cost the borrower $210,000 to repay.

While each monthly payment is the same (approximately $583 a month), the payment is not divided into level amounts of interest and principal. At the beginning, the payments are mostly interest. At the end, the payments are almost entirely principal and no interest.

http://www.bizjournals.com/cincinnati/stories/2004/04/26/focus5.html?pag...

So, let's say you have a housing boom... lots of money is being created, and most of it is being paid back as interest, meaning that most of it is not being destroyed.  Everybody is happy.. lots of liquidity in the early stages. 

But what happens at the tail end of this boom, say 15 years in?  Well... much of the interest has been paid, and the payments are tipping over to favor principle.  Money is being destroyed.  The system's liquidity is being reduced (all other factors equal).  I don't see how anyone could argue that this is not so.  

Some may view all of this as some kind of academic argument.  I don't.. .I think understanding these points are key to understanding what motivates our central bankers.  Around the 14:00 mark in the video below, Alasdair is talking about money creation, and the need for ongoing and increasing money creation.  He says,

either they (the banks) do it, or the FED does... the reason the FED does QE is they are worried the banks aren't doing enough....

The FED wants the total amount of fiat money to continue to expand - otherwise they see a potential crisis.

When the banks are pushing on a string... QE is the only way to keep shoveling money in.  Now ask yourself this;  Do you think we are done with QE now that the taper is completing?  Do the stock vs. flow (model) guys like Dave and Steve Keen think our banking system will be fine through such a liquidity squeeze?  Do their models account for the distorting effects of all the derivatives, interest rate and otherwise?  Will deflation be allowed?  Or do we in fact have a system that is almost always net starved for liquidity because of the fact that total debt runs away from total money?                  

 

 

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 4772
growth imperatives

Climber-

Yes I certainly agree with there being a growth imperative endemic in our current system.

But like a doctor who doesn't care if a fever is caused by a virus or a bacterial infection, if we don't understand the cause of the growth imperative, we might end up prescribing the wrong medicine - or a medicine that will not result in improvement if taken.

So while it sounds super wonky, I actually think its important to understand the root cause of our exponential growth in the money system, so we don't end up trying to "fix" something that isn't actually broken.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 4772
hashed out before?

I'd say it has been "hashed on" before, rather than "hashed out."

Chris's response at that time missed the essence of Steve Keen's argument,  as I pointed out in my follow-on comment which you didn't see fit to include.  :-)  So I'll include it here:

... Keen is not saying "things work out" with our 57 trillion in debt.  He's saying that on this one specific claim - "its not possible to pay the interest on the debt stock because the money isn't created" - it is a stocks/flows fallacy.

In the rest of his talk he shows that bankers have this innate desire to create more debt, and this desire (and their eventual control over government through their profitability) coupled with the ratchet effect will inevitably and repeatedly drive us into crisis as debt continues to grow until we finally blow up from a massive debt bubble...

[Keen] did NOT say that the stocks/flows situation means there is no exponential growth in debt.  But he did seem to suggest it wasn't because of the interest - but rather, the ratchet effect.  No - wait - it was the whole Minsky ponzi finance that first drives everything up, and then breaks down when the "fundamental buyers" start to sell assets because they can no longer cover their interest payments with their cash flow, and that triggers the pop.

So with the added context, now I will answer your questions.

Do people ever pay down their mortgages and get into the "mostly principal is being repaid" stage?  Generally no.  Americans move every 5 years, so we're always paying down the first part of the loan cliff, the point of maximum interest payments.  Tax deductible, of course.  And of course as rates drop, people also refi to get the lower rates.  We haven't been in a rising rate environment for a very long time.  But that's a non-sequitur; its beside the point.

Are banks pushing on a string right now?  Yes.  Will banking system be fine?  No.  Will deflation be "allowed"?  Not if they can help it.

Mostly, I come to the same conclusions you do, while seeing the root cause of the problem as something completely different.

Loans outstanding rise because bankers are extremely motivated to create money - that's how they make money; more loans = more income.  Its banker motivation, not some systemic requirement for a constantly growing money supply that somehow demands loaning the interest payments into existence to keep the system afloat.

In microcosm it is easy to see that the system need not create money stock equal to the aggregate annual interest payment for the whole economy, as long as payments are monthly rather than annually.  Most people's "money needs" don't equal their annual interest burden, or their annual salary - most people place liquidity requirements on the system equal to their income for their pay period, because it goes right back out the door as soon as it comes in.

Yet some people continue to imagine that if you have a $1M loan @ 5%, this requires the outstanding credit in the system to grow by $50k per year or else you just can't make your interest payment.  Certainly, if interest payments vanished into thin air once made, this would be true.  Or if interest payments had to be saved up during the year and made all at once, this would be true too.  But that's not reality.

Again, I share your understanding of the likely consequences, while disagreeing with your diagnosis about the cause.  This distinction seems difficult for me to communicate - both you and Chris persist in imagining I see some happy outcome as a result of me not accepting the "must create money to pay the interest" theory.  I don't.

Again, we agree the patient is being killed.  We just disagree about whether its bacteria or a virus.

That said, knowing the true cause is critical being able to prescribe an effective remedy.

james_knight_chaucer's picture
james_knight_chaucer
Status: Silver Member (Offline)
Joined: Feb 21 2009
Posts: 160

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