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Daily Digest 7/6 - China The Real Elephant In The Room, What Happens In A Dollar Collapse?

Monday, July 6, 2015, 12:28 PM

Economy

Greece debt crisis: China is the real elephant in the room (Arthur Robey)

Greece is a tiny economy with virtually no financial ties to Australia and of limited economic importance to the rest of the world – even Europe. Thus the contagion to other European countries is a possibility but not a probability.

But the contagion effects of a crash in the Chinese stock market to the Chinese economy, Australia and the rest of the world is much more real.

Huge costs of Greece staying in or quitting euro (jdargis)

As for the emergency meeting last night between the Bank of Greece, Greek banks and other representatives of the Athens government, that decided banks today will be subject to the same restrictions as last week (no transfers of funds abroad, a €60 limit on withdrawals from cash machines, a third of branches to open so older people can get their pensions).

But those restrictions expire at the end of today. Which means there will be another meeting of the banks and the authorities tonight to decide how and whether the banks can operate tomorrow.

What Happens in a Dollar Collapse? (Tiffany B.)

According to the classical Ricardian model, international trade is a good thing. It encourages countries to specialize in the production and export of commodities in which they have a “comparative advantage,” and to use those earnings to buy commodities others can produce more cheaply. That’s been the rationale for the dismantling of U.S. manufacturing and its move to Asia, where wages and other input costs are low, relative to the U.S.

Search for Prison Escapees in Northern New York Became Boon for Region’s Economy (jdargis)

As life creeps back to normal after the 23-day manhunt that ended on Sunday, some business owners have reluctantly acknowledged a benefit that emerged from the otherwise distressing ordeal: It was actually something of a boon for the local economy.

“As unfortunate as it was, that was our silver lining,” said Bob Smith, the owner of a Best Western hotel and a restaurant in nearby Plattsburgh, N.Y. “We had a lot of business because of the breakout.”

Aetna Buys Humana For $37 Billion, But Deal Doesn't Add Up (jdargis)

One common argument is that the Affordable Care Act is hurting health insurers, and pushing them to merge — but there’s limited evidence that the biggest players are struggling. While the ACA capped insurers’ ability to take profits, industry analysts have been fairly bullish on the sector.

Markets Become Scary: Crash Point Or Turning Point? (Taki T.)

f anything, the stock market seems to be the best candidate for a severe correction. Purely from a trend perspective (without engaging in technical analysis), it seems that the broad markets have lost momentum, as evidenced by the S&P500 momentum (RSI) versus price divergence. For now, it seems that the path of least resistance will be lower.

Russia Taking Full Advantage Of Greek Crisis


The pipeline remains in limbo. Despite Russian insistence that construction could begin in 2016 and be completed by 2019, the 2 billion euro project does not have firm commitments from Turkey, and it also still faces opposition within Europe, which is trying to wean itself off of Russian gas.

Hawaii Becomes First State in The Nation to Ban Plastic Bags (jdargis)

According to Mashable, the ban contains several important exemptions worth examining. Bags will still be allowed to wrap fruits, vegetables, meat, fish, and take-out home deliveries. Still, retailers caught violating the ban face heavy penalties: anywhere $100 to $1,000 dollars a day, per violation. The island is encouraging businesses to offer alternative bags, including reusable totes, 100% recyclable paper bags, and compostable plastic bags.

Gold & Silver

Click to read the PM Daily Market Commentary: 7/3/15

Provided daily by the Peak Prosperity Gold & Silver Group

Article suggestions for the Daily Digest can be sent to [email protected]. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."

25 Comments

saxplayer00o1's picture
saxplayer00o1
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Tall's picture
Tall
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Good Luck Finding a Place to Hide as Global Markets Crumble

Investors tend to respond to impending doom by selling risky stuff and hiding out in safer assets -- namely, bonds in places such as Germany and the U.S.

There’s a problem with that formula this time around: Traders aren’t so sure they can find anything that’s truly safe right now.

Investors yanked $2.9 billion from European government bond funds last week, more than ever before, and pulled $699 million from short-term investment-grade U.S. bond funds, Bank of America Corp. and Wells Fargo & Co. data show.

http://www.bloomberg.com/news/articles/2015-07-06/good-luck-finding-a-pl...

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Boomer41
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Bank Fines are Futile

During his tenure as AG,  Holder stated that he would not prosecute big banks because of the risk of systemic instability it might cause. Now he thinks the bank executives should be immune from prosecution.

With this lack of law enforcement at the highest level, bankers can commit crimes with absolute impunity.

We cannot expect the criminal activity of the TBTF banks to end until the management and stockholders of those banks are made personally responsible for the actions of their organizations.

Fining a bank is futile, but a few really long prison sentences would work wonders.

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sand_puppy
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What? ECB "Adjusts" Greek ELA Haircuts; Full "Deposit

I would love to have out team of economic wonks translate this for us mere mortals.

It Begins: ECB "Adjusts" Greek ELA Haircuts; Full "Depositor Bail-In" Sensitivity Analysis

Thank you.

Time2help's picture
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Translation
sand_puppy wrote:

I would love to have out team of economic wonks translate this for us mere mortals.

It Begins: ECB "Adjusts" Greek ELA Haircuts; Full "Depositor Bail-In" Sensitivity Analysis

Thank you.

Grandma, Grandpa and Joe Plumberoxi take it up the wazoo.

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davefairtex's picture
davefairtex
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what are haircuts?

SP-

The primary job of a central bank is to prevent bank runs, by standing ready to lend cash to any member bank upon presentation of good collateral, after applying a haircut.  What does that mean?

Pretend I'm a bank.  I have a billion dollars in mortgages I've lent out.  I have no cash.  Depositors come to my bank, and want their money back - lets say they want $100 million.  I go to my friendly central bank, and say "hey, here's $150 million in mortgages, can you lend me some cash?"  Central bank says "yes of course, that's my job - one might say its my entire reason for being - but I'm only going to give you $100 million, because I'm going to apply a 33% haircut."

Why have haircuts?  During a crisis, the central bank needs to assess "how good" those loans are, and then apply an appropriate haircut so if things go really bad, the central bank doesn't lose money.  The more uncertainty, the higher the haircut.

So, the net result of the sample transaction:

Central bank gets $150M in mortgages from me.

Central bank "prints" $100M in new cash, hands it to me.

I hand $100M to my depositors.  Everyone is happy, and my bank remains solvent.

Once things calm down and my depositors return, I repay the loan to the central bank, recover my mortgages, and I continue making the spread.

So what did the ECB do to the Greek banks?  They raised the "haircut" value from 50% to 60%, because presumably they assessed that the Greek bank collateral dropped in quality as a result of the referendum.  (I didn't realize they could raise the haircut on loans already made - learn something new every day.  Its good to be a central bank.)

By raising the haircut, the ECB has effectively cut off the Greek banks from getting more cash.  Under the 50% haircut value, there was still 20B in collateral the Greek banks had left.  With the 60% number, they are now out of collateral.  If a depositor comes and asks for money, the Greek banks have none to give because of the new higher haircut value.  The bank will fail.

The point of a central bank - the entire reason central banks exist - is to prevent the failure of otherwise-solvent banks due to bank runs.  By this action, the ECB is guaranteeing the failure of all the Greek banks.

 

 

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Time2help
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Haircuts - Pain and theft
davefairtex wrote:

The point of a central bank - the entire reason central banks exist - is to prevent the failure of otherwise-solvent banks due to bank runs.  

Negative.

The point of a central bank is to "secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft." -- British Lord John Maynard Keynes

Haircuts are just a bit more in-your-face.  Because options are becoming limited.

cmartenson wrote:

Repeat after me, banks are a scam

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Tim Ladson
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Holder Completes the Circle

The revolving door is alive and well as Eric Holder is returning to his previous employer Covington and Burling, a corporate law firm serving Wall Street.  

sand_puppy's picture
sand_puppy
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Greeks getting haricuts

Thanks DaveF.  It is very handy having macro-economic consultants on hand.  :-)

On the subject of causing the Greek banks to fail.  Any ideas what this is about?

Also, at least one writer thinks that the reason the Troika wants to delay further negotiations a bit is to let the hunger and rioting get started first!

Arthur Robey's picture
Arthur Robey
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Less sanguine about Europe.

I Don't know how they pulled it off, but it looks as though France has managed to stiff Spain, Italy and Germany with the Greek loan.

 Unless the USA goes in and bangs some heads together we can anticipate some very disappointed African immigrants. Europe reminds me of the little girl who had a little curl, right in the middle of her forehead. And when she was good, she was very, very good. But when she was bad, she was horrid. 

In short, France has managed to use the Greek bailout to offload €8 billion in junk debt onto its neighbors and burden them with tens of billions more in debt they could have avoided had Greece simply been allowed to default in 2010.  The upshot is that Italy and Spain are much closer to financial crisis today than they should be.

http://www.zerohedge.com/news/2015-07-06/greece-fallout-italy-and-spain-...

I'll bet Putin is eating popcorn.

Edit: Of cause the Fed could do the right thing and pick up the Greek tab. Or watch the European project go down the gurggler.

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LogansRun
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You sound like a CB spokesperson

I appreciate quite a bit of what you do for the site but, too many times you show your lack of understanding of the true origins/purpose of the banking system.

Too many times your posts sound like propaganda pieces for the PTB.

 

peace

 

davefairtex wrote:

SP-

The primary job of a central bank is to prevent bank runs, by standing ready to lend cash to any member bank upon presentation of good collateral, after applying a haircut.  What does that mean?

Pretend I'm a bank.  I have a billion dollars in mortgages I've lent out.  I have no cash.  Depositors come to my bank, and want their money back - lets say they want $100 million.  I go to my friendly central bank, and say "hey, here's $150 million in mortgages, can you lend me some cash?"  Central bank says "yes of course, that's my job - one might say its my entire reason for being - but I'm only going to give you $100 million, because I'm going to apply a 33% haircut."

Why have haircuts?  During a crisis, the central bank needs to assess "how good" those loans are, and then apply an appropriate haircut so if things go really bad, the central bank doesn't lose money.  The more uncertainty, the higher the haircut.

So, the net result of the sample transaction:

Central bank gets $150M in mortgages from me.

Central bank "prints" $100M in new cash, hands it to me.

I hand $100M to my depositors.  Everyone is happy, and my bank remains solvent.

Once things calm down and my depositors return, I repay the loan to the central bank, recover my mortgages, and I continue making the spread.

So what did the ECB do to the Greek banks?  They raised the "haircut" value from 50% to 60%, because presumably they assessed that the Greek bank collateral dropped in quality as a result of the referendum.  (I didn't realize they could raise the haircut on loans already made - learn something new every day.  Its good to be a central bank.)

By raising the haircut, the ECB has effectively cut off the Greek banks from getting more cash.  Under the 50% haircut value, there was still 20B in collateral the Greek banks had left.  With the 60% number, they are now out of collateral.  If a depositor comes and asks for money, the Greek banks have none to give because of the new higher haircut value.  The bank will fail.

The point of a central bank - the entire reason central banks exist - is to prevent the failure of otherwise-solvent banks due to bank runs.  By this action, the ECB is guaranteeing the failure of all the Greek banks.

 

 

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saxplayer00o1
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"Affordable" Care Act

"Blue Cross and Blue Shield plans — market leaders in many states — are seeking rate increases that average 23 percent in Illinois, 25 percent in North Carolina, 31 percent in Oklahoma, 36 percent in Tennessee and 54 percent in Minnesota, according to documents posted online by the federal government and state insurance commissioners and interviews with insurance executives."

 

"The biggest beneficiaries will be the shareholders and a handful of top executives; they’ll make tens of millions of dollars on the day the transactions become final. Among the losers—in addition to the people enrolled in the insurers’ health plans—will be many of the employees of the acquired companies. And taxpayers in the cities that come out on the short end of the stick when the combined companies decide where the corporate headquarters will be."

=================================

"Affordable" my..........

saxplayer00o1's picture
saxplayer00o1
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Over 20% of listed China stocks now in trading halt

"Chinese stocks declined Tuesday morning, returning to the loss column after the Chinese government's drastic market-stimulus efforts led to gains the previous day. The Shanghai Composite Index SHCOMP, -4.23% opened down 3.2%, then trimmed losses but remained 2% lower an hour into the session. "

 

davefairtex's picture
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shilling for the Fed

logansrun-

From my reading of history, I actually like having an entity that prevents bank runs.  I don't like the rest of what they do today, but I sure do like avoiding bank runs.

Imagine if we had a total police state.  As in, Nazi Germany.  A person suffering under that regime might take the position that police are bad to have in a society, and that the solution to the problem is that we should simply get rid of all police.  If I articulate the viewpoint that police are actually important to have in society, and that their original function was pretty reasonable, but they had drastically overstepped their original assignment and like an insanely overgrown bush, they needed to be pruned back...my suggestion would be seen by many to be offensive, and I probably would be seen as a shill for the Gestapo.

Just like today.

You really want to eliminate the lender of last resort in the system?  That's like getting rid of all police because you don't happen to like the current police state.

Lending against good collateral to prevent bank runs is a fine function to have.  Printing vast amounts of new base money in an attempt to control interest rates - that's a terrible idea.  But there's no need to throw the baby out with the bathwater.

Just my opinion.

davefairtex's picture
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causing Greek banks to fail

SP-

Greek banks were in a dreadful state long before Syriza came along.  I read that the non performing loans were upwards of 60%.  Those banks are basically already gone - dead banks walking, so to speak.  Choosing this moment to pull the plug is a political choice, not a monetary system choice.  If the banks were bad before, and they're just as bad now, but the ECB was ok with propping them up in the past but somehow isn't ok now...I think that's what they are talking about.

Actually fixing a failing banking system is a real can of worms; either bail-ins, or outright bankruptcy, with the losses to uninsured depositors.  Insured depositors need to get paid by somebody - who?  Greek government doesn't have the cash.  Bad Greek banks is a major, expensive problem.  So, of course, the EU avoided the issue and kicked the can by having the ECB do its "lender of last resort" trick.  Bad banks need to be resolved, not propped up, but that requires actually grasping the nettle firmly, which nobody these days wants to do.

"As long as you put a shill in charge of your government who is willing to execute the ongoing fiscal waterboarding of the country, we'll keep your failing banks going.  As soon as you stop following orders, we pull the plug and your banks go down the drain...depositors losing all their money, etc."  And guess who the people will blame for the disaster?

Your writer that suggests they want hunger and rioting to take place...it does seem to align with the facts on the ground.  Some societies believe in bankruptcy/forgiveness/a new start, and others don't.  Back in the day we had debtor's prisons.  Judging by their actions, a chunk of Europe wants Greece to be in some sort of permanent debtor's prison, to encourage all of the others to toe the line.

Europe controls the banks of Greece.  Pull the plug on the banks, and the society no longer has liquidity to function, not to mention destroying the savings of the people.  Varoufakis is right when he said Greece was being deliberately suffocated by the EU.  Extend and pretend was great as long as the fiscal waterboarding could continue.  Once the victims objected, it was, "I'm shocked, simply shocked to see the awful condition of your banking system!"

EU politicians have talked themselves into a corner.  They bailed out their own banks on the backs of the Greek people, they strongarmed the Greek government to accept the deal, they explained to their own electorate that the Greeks were at fault, and now they have no room to maneuver.  Forgive the lazy Greeks' debt?  Politically impossible!

So all that's left is to continue torturing Greece until...well until the problem somehow goes away all on its own.  Perhaps another six month can-kicking will do the trick, and a miracle will occur in the meantime.  And, conveniently, the Euro stays down and helps all those exporters make money.

 

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Fairy Tales for A Gulible People

(Continuing with my personal theme of the evening:  naming psychopaths so that they do not need to be trusted any longer ....)

Jade Helm, Terrorist Attacks, Surveillance & Other Fairy Tales For A Gullible Nation

by John Whitehead

Once upon a time, there was a nation of people who believed everything they were told by their government.

 

When terrorists attacked the country, and government officials claimed to have been caught by surprise, the people believed them. And when the government passed massive laws aimed at locking down the nation and opening the door to total government surveillance, the people believed it was done merely to keep them safe. The few who disagreed were labeled traitors.

When the government waged costly preemptive wars on foreign countries, insisting it was necessary to protect the nation, the citizens believed it. And when the government brought the weapons and tactics of war home to use against the populace, claiming it was just a way to recycle old equipment, the people believed that too. The few who disagreed were labeled unpatriotic.

 

When the government spied on its own citizens, claiming they were looking for terrorists hiding among them, the people believed it. And when the government began tracking the citizenry’s movements, monitoring their spending, snooping on their social media, and surveying their habits—supposedly in an effort to make their lives more efficient—the people believed that, too. The few who disagreed were labeled paranoid.

When the government let private companies take over the prison industry and agreed to keep the jails full, justifying it as a cost-saving measure, the people believed them. And when the government started arresting and jailing people for minor infractions, claiming the only way to keep communities safe was to be tough on crime, the people believed that too. The few who disagreed were labeled soft on crime.

 

When the government hired crisis actors to take part in disaster drills, never alerting the public to which “disasters” were staged, the people genuinely believed they were under attack. And when the government insisted it needed greater powers to prevent such attacks from happening again, the people believed that too. The few who disagreed were told to shut up or leave the country.

Finally, the government started carrying out covert military drills around the country, insisting they were necessary to train the troops for foreign combat, and most of the people believed them. The few who disagreed, warning that perhaps all was not what it seemed, were dismissed as conspiracy theorists and quacks.

 

By the time the government locked down the nation, using local police and the military to impose martial law, there was no one left in doubt of the government’s true motives—total control and domination—but there was also no one left to fight back.

Now every fable has a moral, and the moral of this story is to beware of anyone who urges you to ignore your better instincts and trust the government.

For instance, while there is certainly no shortage of foul-smelling government activities taking place right now, the one giving off the greatest stench is Jade Helm 15. This covert, multi-agency, multi-state, eight-week military training exercise is set to take place from July 15 through Sept. 15 in states across the American Southwest.

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keynes mis-quoted, and central banking

TTH-

The point of a central bank is to "secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft." -- British Lord John Maynard Keynes

So you've got three problems here.  First, your quote isn't accurate, and second, in context Keynes was referring to governments, not central banks.  Third, the Fed, from 1920-1960, did just fine with inflation.  Gold backing of the currency was relatively consistent right up until the end of the 1950s.  Its only after that when things became problematic.  That's what the evidence says anyway.  If you have evidence to the contrary, we can have a debate on the merits, rather than just doing the usual mindless Internet thing of throwing inaccurate quotes at one other.

Just FYI here is the actual quote, from the actual book, complete with context:

http://www.gutenberg.org/files/15776/15776-h/15776-h.htm

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers", who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

In the latter stages of the war all the belligerent governments practised, from necessity or incompetence, what a Bolshevist might have done from design.

Now then, about central banking.

The Fed was created to stop bank runs.  It morphed as time passed.  Thats generally how things happen - with our central government, with the Fed, as with most institutions they start out with reasonable intent, and they gradually accumulate more power and influence until they become monsters that run out of control and you end up with Monsanto, Big Pharma, TBTF banking, The Fed of Today, the Patriot Act-enabled NSA Surveillance State, and the Affordable Care Act.

That doesn't mean we shouldn't have drugs, or improve seeds, have a credit system, avoid bank runs, be able to monitor enemy communications, or have nationally-supported health care.  Society should be able to do all those things, just not in the extreme power-mad, crony-capitalist way we are doing them all today.

Again, my opinion.

Time2help's picture
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On Haircuts
Time2help wrote:

The point of a central bank is to...

Keynes wrote:

"secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."

Fixed it for ya.

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An honest trader

davefairtex's picture
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fixed?

Eh.  Seems like you are still grabbing two separate phrases you liked from two different paragraphs, stuck them together, said "Keynes wrote this", and then changed the subject he was talking about from "government" to "central bank" because you don't like central banks.  I could replace "central bank" with "wee beasties" and it would be just as meaningful.  Keynes will now be supporting my thesis!

As in:

Dave wrote:

"Its the wee beasties stealing the money!  They,"

Keynes wrote:

"secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."

Sneaky beasties.  :-)

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Fed did just fine, if you ignore that little event in 1929. :-)
davefairtex wrote:

Third, the Fed, from 1920-1960, did just fine with inflation.

Hmm, I do question this a bit.  Seems like they had a bit of a problem with inflation during the 1920's ending with a devaluation in 1933.  Then I guess you can say they did okay, as long as you cherry pick a few dates so as to ignore the inflation that led up to the other devaluation in 1971.  Would you also say they did okay with inflation from 1990-2015?

davefairtex wrote:

Lending against good collateral to prevent bank runs is a fine function to have.

As long as you ignore the fact that the banks don't have good collateral.  Hence the bank run because they are bankrupt.  No, I don't agree central banks should exist to prevent bank runs because it creates moral hazard.  You as a creditor to a bank should be at risk because there is risk.

Arthur Robey's picture
Arthur Robey
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Towards Complexity.

Bad luck Dave. I'm on your side.

What is happening is that the universe is doing what the universe does- complexifying. In the beginning banking was a simple arrangement. Now it is incomprehensible.  The process is not complete. If you think you have a handle on it now, just you wait.

Boomer41's picture
Boomer41
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Central Banks are Evil

The Federal Reserve was created, secretly and in the dead of night, to give private bankers control of the currency of the United States. There is nothing good about this.

The Fed says it's role is to prevent inflation. Whereas in fact it has been directly responsible for the most inflation the US currency has ever seen.

Saving banks from bank runs is simply saving thieves from going to jail.

Even central bankers themselves admit they are evil. Sir Josiah Stamp (President of the Bank of England in the 1920′s, the second richest man in Britain) said: “Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth.  If you wish to remain the slaves of Bankers, and pay the cost of your own slavery, let them continue to create debt.” 

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Terence

Seems to be describing a ticking clock simulating a count down. What happens when complexity, excuse me Novelty can not novelify any further because the time constraints have become too narrow?

Rose

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