Is the US too big to fail?

[usctrojanman29_IHB]

The thing that I don't get is that the long end of the bond market is rallying big time even though you'd think that with all the new debt being issued it'd have upside pressure on yields. Is the bond market trying to tell us that we are heading into a depression like environment?

 

[awgee_IHB]

The thing that I don't get is that the long end of the bond market is rallying big time even though you'd think that with all the new debt being issued it'd have upside pressure on yields. Is the bond market trying to tell us that we are heading into a depression like environment?

Hmm-m-m, I dunno.

As the hedge funds deleverage, they have to park the money someplace before they fulfill redemptions. I am just guessing.

 

[stepping_up_IHB]

Loans do create money. One of the ways that the government can affect the amount of dollars is by changing the amount banks can lend vs their deposits. We have one of the highest in the world. For every dollar in deposits, banks only have to set aside 10 cents and can loan 90 cents to someone else. Joe deposits $1,000, bank lends Bob $900, so Bob has his $900 and Joe has his $1,000 and $100 goes into reserve. The fact that banks are hording cash though means that they are decreasing the dollars available.

 

[stepping_up_IHB]

In theory, debt creation should be a temporary phenomenon. A loan is made, money is created, and when a loan is paid back, money is destroyed. Fluctuations in created debt should not be either inflationary or deflationary.


In normal times, banks would take the money Bob paid back on his loan and make a new loan to Peter. The $1,000 that Joe deposited, leaves $900 for the banks to lend. Bob pays back $500, so the bank still has $400 to lend to Peter.

 

[IrvineRenter_IHB]

Personally, I think it a fallacy that an increasing money supply is necessary for economic growth. Consider an example society consisting of ten people, $1000, and five chairs. The society becomes more productive and makes ten chairs. The price of chairs goes down. So what? More chairs, same work, decreasing price. That's productivity with a fixed money supply.

Did the money supply increase while this country and other societies were on a gold standard? Were this country and other societies any less productive as a result? If you research, I think you would be surprised to find just the opposite, because banks can not control interest rates, governments can not conduct wars without citizen approval and real monetary support, and no one or group can control and abuse the money supply on a real gold standard.

I am glad you made the example of the chairs. That makes my point. If the FED is supposed to promote price stability, when the society makes 10 chairs instead of 5, the FED would need to increase the money supply to keep the cost of chairs the same.

Let me lay out a similar example with easy math:

Assume a society of 10 people makes 10 chairs, and there is $1,000 in circulation. Each chair would be worth $100. If the society next year makes 20 chairs, and the amount of money in the society is fixed, then the value of each chair drops to $50 ($1000/20). A reduction in price like that would be disastrous for business. An entrepreneur would only increase production if he believed the price would be higher in the future. If the amount of money in circulation were increased to $2,000, then the value of each chair would still be $100, and there would be price stability. This is why I believe money supply should increase to account for the value added through providing goods and services, particularly in manufacturing. I don't see this as inflationary as long as the total amount of money in circulation matches the value of the productive output of a society. In fact, without it, I don't think business would function because an increase in production would result in lower prices.

The problem fiat currencies face in the real world is that there is enormous temptation to grow the money supply in excess of the value added through production. That is inflationary. I remember reading in Extraordinary Popular Delusions and the Madness of Crowds about John Law. He created the first successful fiat currency in France. It was successful until the King started printing notes in excess of the available gold. As a result, the value of the paper currency collapsed. IMO, the value of a gold standard is it prevents the people who control the currency from creating inflation through excessive printing. However, the weakness is its inability to keep up with societal production. If we add 1% each year to the world's gold reserves, but our economies grow at 3%, the money supply will never keep up, and you will have the problem with business I identify above.

 

[PeterUK_IHB]

In theory, debt creation should be a temporary phenomenon. A loan is made, money is created, and when a loan is paid back, money is destroyed. Fluctuations in created debt should not be either inflationary or deflationary.


In normal times, banks would take the money Bob paid back on his loan and make a new loan to Peter. The $1,000 that Joe deposited, leaves $900 for the banks to lend. Bob pays back $500, so the bank still has $400 to lend to Peter.

I heard yesterday that we now have yet another "stimulus package" to the tune of $220bn which will help finance Auto Loans and Credit Cards..this money will bypass the traditional Banks and go directly to lending institutions?

 

[awgee_IHB]

So ... let's say you were making ten chairs per month. And you figure out how to make twenty per month. And the money supply is fixed. There is a total of $10,000 in society to pay for everything including chairs.

It seems to me that the money will circulate and it matters not one iota whether there is a fixed amount of $10,000 or $100,000. You, the chairmaker, will make more chairs in order to get a bigger piece of the total money supply pie. If you were getting $1000 out of the total $10,000 before your increase in productivity, then when you can make twenty chairs, the price will go down, but not to half so that you get the same $1000. Your share of the pie will now be some where between $1000 and $2000. You will be rewarded for your increased productivity or else you will not make more chairs, like you said. The twenty chairs will sell for what they are wo5rth to society with no need from a central bank or central planner to decide what that price is.

The money does not stay in one place. It ciculates or maybe it is saved.

I think the only problem is when one person is able to print more without a corresponding contribution to productivity. That person can buy without adding anything to society and devalue everybody else's money.

Look at history, at civilizations that were on a gold satndard with a fixed money supply. Did it hinder their economic growth?

Growth through an increase in money supply is not growth at all, but is rather a redistribution of wealth from the producing to the non-producing.

I fear I ma doing a terrible job at explaining this. When I find a better explanation by someone more knowledgeable and coherent than myself, I will post.

 

[upperlowerclass_IHB]

In a purely logical emotionless environment, where everyone in society was a robot, a fixed money supply and one that grows with increased production would have no difference economically. The numbers are simple here. However, the psychological impacts of the two systems on real ppl (esp stupid ones) I think would produce two different economies. This is what makes choosing the better money system near impossible, atleast for us numbers guys.

 

[awgee_IHB]

In a purely logical emotionless environment, where everyone in society was a robot, a fixed money supply and one that grows with increased production would have no difference economically. The numbers are simple here. However, the psychological impacts of the two systems on real ppl (esp stupid ones) I think would produce two different economies. This is what makes choosing the better money system near impossible, atleast for us numbers guys.

If the money supply grew and everybody received a proportional increase to their productive output, it would make no difference.

 

[upperlowerclass_IHB]

Business incentive for increased productivity in a fixed money supply:

1st case

$100 money supply

10 ppl

Company A makes 5 chairs

Company B makes 5 chairs

10 chairs sell for $10/each, $50 to each company

2nd case

$100 money supply

10 ppl

Company A makes 10 chairs (this company finds a new way to make twice the chairs for same cost)

Company B makes 5 chairs

15 chairs sell for $6.66/each, $66.66 to company A and $33.33 to company B. Important to note that those at company B can still buy as many chairs as they did in the 1st case (although they have less $ their quality of living is not degraded by company A), however those at company A can afford twice as many chairs.

 

[Oscar_IHB]

If the bank gets $10,000 from the government, but doesn't lend it nor spend it, wouldn't that have zero effect on the cost of chairs in any of the above examples? I mean, the bank might have the money, but it's not actually in circulation so how can that extra cash cause inflation?

 

[IrvineRenter_IHB]

Business incentive for increased productivity in a fixed money supply:

1st case

$100 money supply

10 ppl

Company A makes 5 chairs

Company B makes 5 chairs

10 chairs sell for $10/each, $50 to each company

2nd case

$100 money supply

10 ppl

Company A makes 10 chairs (this company finds a new way to make twice the chairs for same cost)

Company B makes 5 chairs

15 chairs sell for $6.66/each, $66.66 to company A and $33.33 to company B. Important to note that those at company B can still buy as many chairs as they did in the 1st case (although they have less $ their quality of living is not degraded by company A), however those at company A can afford twice as many chairs.

To me, this is where theory and reality part ways. Companies will not increase production unless they can make more money. It doesn't matter whether or not there is more or less money on a relative basis. How would you account for that? How would you know if you are making any money? In short, I don't see how anyone could conduct business in a world with a fixed money supply. Without an expansion in money supply to account for the increased production and value added to a society, there is no way to accurately account for profits. We would all be competing to see who could devalue the other more. That is crazy.

 

[ukyo116_IHB]

Shouldn't the fact that they stopped printing M3 be enough proof that we are going to head into massive inflation?

 

[awgee_IHB]

Business incentive for increased productivity in a fixed money supply:

1st case

$100 money supply

10 ppl

Company A makes 5 chairs

Company B makes 5 chairs

10 chairs sell for $10/each, $50 to each company

2nd case

$100 money supply

10 ppl

Company A makes 10 chairs (this company finds a new way to make twice the chairs for same cost)

Company B makes 5 chairs

15 chairs sell for $6.66/each, $66.66 to company A and $33.33 to company B. Important to note that those at company B can still buy as many chairs as they did in the 1st case (although they have less $ their quality of living is not degraded by company A), however those at company A can afford twice as many chairs.

To me, this is where theory and reality part ways. Companies will not increase production unless they can make more money. It doesn't matter whether or not there is more or less money on a relative basis. How would you account for that? How would you know if you are making any money? In short, I don't see how anyone could conduct business in a world with a fixed money supply. Without an expansion in money supply to account for the increased production and value added to a society, there is no way to accurately account for profits. We would all be competing to see who could devalue the other more. That is crazy.

It is no different by increasing the money supply. They aren't oranges which you can eat. They are just pieces of paper which have no inherent value and it matters not if it takes ten dollars or twenty dollar to buy one chair if it takes you the same time to earn either. Increasing the money supply has but one purpose, to tax surreptitiously. It is the amount of time or it takes you to earn something that matters. It matters not if you pay ten dollars or one thousand lira, if you earn ten dollars per hour or ten thousand lira per hour. Just because they are called dollars now and dollars one year from now does not mean they are the same. I think you are mistakenly thinking tahat because they are called dollars now and dollars one year from now that they have the same value, and increasing their number increases overall wealth. If that were true, the Fed could just print bazillions of dollars and everybody could be wealthy. And it does not matter one iota that the population increases. They are still just pieces of paper which have no inherent worth, whether there are ten people using them or one million people using them. And neither does it matter that the population increases and the money supply both increase. If neither matters in and of itself, they don't matter just because both occur.

You keep on repeating the same thing, but you have not answered my question: Were societies which used a fixed money supply hindered by that fixed money supply? Was the USA when it was on a gold standard and a fixed money supply?

 

[awgee_IHB]

If there are five people each with one dollar and each of five oranges cost one dollar, then each person can buy one orange, right? If you give each person one more dollar each, then no one is advantaged or disadvantaged by the increase in money supply, right? Each orange will now cost two dollars based on the availability of money. It isn't the increase or decrease in the money supply itself which increases wealth or decreases wealth. It is the manner in which the new money is distributed. If instead of giving each person one dollar each, you give just one person, Sally, all extra five dollars, the price of the oranges will go up, but only Sally will be advantaged by the increase and the rest will be disadvantaged. If there are only five dollars in the MS, and Joe grows five MORE oranges and there are now ten oranges, Joe will be advantaged because although the price will go down, Joe will still end up with more money. And do we not prefer that people are rewarded for their efforts? When the government increases the money supply, the gov gets something for nothing and everyone else is disadvantaged because their money is worth less. No wealth has been created by increasing the money supply. And just as increasing the money supply does not create wealth, an increase in the money supply is not necessary for an increase in wealth. Someone needs to grow more oranges.

 

[Trooper_IHB]

lol article title updated to 7.7 tril

lol, total now up to 8.5 Trillion

The total cost of funds committed to the bailout in its various guises has now hit $8.5 trillion dollars, up from $7.7 trillion in just two days after the federal government committed an additional $800 billion to two new loan programs on Tuesday.

 

[IrvineRenter_IHB]

It is no different by increasing the money supply. They aren't oranges which you can eat. They are just pieces of paper which have no inherent value and it matters not if it takes ten dollars or twenty dollar to buy one chair if it takes you the same time to earn either. Increasing the money supply has but one purpose, to tax surreptitiously. It is the amount of time or it takes you to earn something that matters. It matters not if you pay ten dollars or one thousand lira, if you earn ten dollars per hour or ten thousand lira per hour. Just because they are called dollars now and dollars one year from now does not mean they are the same. I think you are mistakenly thinking tahat because they are called dollars now and dollars one year from now that they have the same value, and increasing their number increases overall wealth. If that were true, the Fed could just print bazillions of dollars and everybody could be wealthy. And it does not matter one iota that the population increases. They are still just pieces of paper which have no inherent worth, whether there are ten people using them or one million people using them. And neither does it matter that the population increases and the money supply both increase. If neither matters in and of itself, they don't matter just because both occur.

You keep on repeating the same thing, but you have not answered my question: Were societies which used a fixed money supply hindered by that fixed money supply? Was the USA when it was on a gold standard and a fixed money supply?

I think central bankers would argue that all societies, including the US, were hindered by a fixed money supply, or else we would not have abandoned it (I know you disagree, but it is the only answer to your question).

 

[IrvineRenter_IHB]

If there are five people each with one dollar and each of five oranges cost one dollar, then each person can buy one orange, right? If you give each person one more dollar each, then no one is advantaged or disadvantaged by the increase in money supply, right? Each orange will now cost two dollars based on the availability of money. It isn't the increase or decrease in the money supply itself which increases wealth or decreases wealth. It is the manner in which the new money is distributed. If instead of giving each person one dollar each, you give just one person, Sally, all extra five dollars, the price of the oranges will go up, but only Sally will be advantaged by the increase and the rest will be disadvantaged. If there are only five dollars in the MS, and Joe grows five MORE oranges and there are now ten oranges, Joe will be advantaged because although the price will go down, Joe will still end up with more money. And do we not prefer that people are rewarded for their efforts? When the government increases the money supply, the gov gets something for nothing and everyone else is disadvantaged because their money is worth less. No wealth has been created by increasing the money supply. And just as increasing the money supply does not create wealth, an increase in the money supply is not necessary for an increase in wealth. Someone needs to grow more oranges.

Nothing I have stated is in disagreement with your statements above except "an increase in the money supply is not necessary for an increase in wealth." I believe the money supply must be increased to recognize the increase in wealth. Increasing money supply without a commensurate increase in the total value of goods and services in the society does nothing but devalue the currency. What I am saying is that the FED should be increasing the money supply to match the added value of goods and services. Printing money, without regard to an artificial standard like gold, should be a tool of monetary policy. If the FED does too much of it, if they do not match the productive output of our citizens, then the currency is devalued and we have inflation. If they do not print enough of it, the currency becomes overvalued, and the prices of goods and services declines which is bad for business. This is the balancing act the FED must perform.

From what I have observed, all the calls for going back to a gold standard revolve around one thing: nobody believes the FED has enough talent or discipline to regulate the growth of money supply to prevent inflation. They may be right. Being on a gold standard would certainly be effective at preventing inflation. However, we may experience deflation if the long-term growth of wealth outpaces the worldwide production of gold. If I understand your arguments correctly, you do not believe this would be a problem. I believe it would for the reasons I have mentioned above.

 

[no_vaseline_IHB]

The fruit business is just horrible this past year or so.

Horrible like jump out the window in a tall building horrible.

 

[Hormiguero_IHB]

If money supply to prevent inflation. They may be right. Being on a gold standard would certainly be effective at preventing inflation.

If one is serious about researching this a bit, here are a few tangents which I have found interesting:

- Historically overlay the great gold strikes 1850-1920 (California, Klondike, South Africa) with the volatility caused by these events.

- Historically overlay the dollar/silver trade through all 230 years of our nation's history with the USA's engagement in war.

- Overlay a steady 8% return on gold from the delinkage @ 38 bucks in the early 70s with the real gold price chart from that period.

- Overlay the contemporaneous oil price onto the same chart.

The above will answer a few questions and raise a few new ones.