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Personal income in the US grew over 20% from February to March. March of 2021, the last month for which full data are available, was the most lucrative month in American history in terms of personal income–by a long shot!

Not at all unrelatedly, March also set a new all time record trade deficit. The US imported $2.5 billion more in goods and services per day than it exported.

To ‘finance’ this, the Federal Reserve’s balance sheet approaches $8 trillion. That ‘financing’ is the only thing keeping interest rates from exploding upwards and burying the country under an unserviceable avalanche of debt, the only way of extracting the buried being the breaking of the dollar. If rates are permitted to rise, the bond and equity markets will crash, something made clear in late 2018 when the Fed attempted very tepid tightening.

The labor force participation rate, after rebounding from its Covid nadir, appears to have settled at a low level not seen since the late 1970s. Proto-UBI in the forms of extended unemployment, eviction moratoriums, and the like are politically unrescindable. There is thus no reason to expect employment to return to pre-Covid levels. The low-end labor shortages apparent throughout the economy aren’t ending, either.

Not without big increases in wages, anyway. Labor is a cost. It costs businesses significantly more to operate today than it did 18 months ago. Those costs are in the process of manifesting in higher prices for everything from haircuts to a hamburgers.

These effective labor shortages are accompanied by increasing goods shortages at every point in the supply chain. Nearly all commodity prices are trending upwards.

One notable exception has been gold. The conventional explanation for why is the assumption central banks will respond to all these price inflation indicators by raising rates, something that inversely correlates with the price of gold and other traditional inflation hedges. With the Fed and Treasury joined at the hip, the pretense of any American institution being politically independent a thing of the past, that is highly unlikely. The bankers aren’t going to do the Biden administration dirty like that, not in a million years. Central banks won’t fight inflation, they’ll surrender to it without a fight.

Why not gold, then? Cryptocurrencies are the 20-pound puppy in the room. A year ago, crypto’s global market capitalization was less than 1% that of gold. Today, it’s more than 20% of gold’s and gaining fast. Had the money that went into crypto over the last six months instead gone into gold, gold would be trading at over $2,500 an ounce.

All of these things point to substantial price inflation on the horizon. Unlike the financial crisis of 2007-2008, the Fed has no tools in its toolkit to respond to this. On the eve of that crisis, regular people were earning a 5% return on commercial money market accounts. Plunging the return from 5.0% to 0.5% provided a lot of cushion for the financial crash.

But that cushion is long gone. It’s all concrete now. Brace for impact.

 
• Category: Culture/Society, Economics, History • Tags: Economics, Future, Investing 
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  1. Gold is real and immutable. Doggy coins are neither.

    In China, India and other old places, gold is as popular as ever. It is far more a part of their traditions than ours, and it is very popular. There is your market.

    My money in on (and in) gold.

    BTW, its price is being artificially held down via the usual financial paper tricks. In its real, physical form, it is still finite — and more people than there are of us value it for what it is. That is not about to change.

    • Agree: Daniel H, Realist
    • Replies: @Chrisnonymous
    @Buzz Mohawk

    Do you own physical gold or pieces of paper that say you purchased gold existing somewhere? Indians really like having physical gold. Around their necks, hanging from their ears, woven into their clothing, etc. Kind of like black rappers.

    I would like to have physical gold, but I worry about storing it safely. You have to keep in your abode or it isn't really yours. But if you keep it, your wealth is liable to be stolen or lost in a conflagration, etc. This is how banks started, I imagine, but I wouldn't trust a bank today.

    Replies: @Achmed E. Newman, @Buzz Mohawk, @Magic Dirt Resident

    , @Yellowface Anon
    @Buzz Mohawk

    What the lights go out, cryptos go poof.

    Replies: @Buzz Mohawk

  2. anonymous[713] • Disclaimer says:

    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?

    • Replies: @V. K. Ovelund
    @anonymous

    I am no economist but an amateur who has taken a decades-long interest and has even read a little of the professional economic literature (written by economists for an audience of economists), so you can take my answer for what it's worth.


    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    A digression is necessary to review the subtle mechanism by which new money is injected into circulation. If you already know the mechanism, then you can skip to the bottom.


    1. The printing of money. The Federal Reserve prints money. The printing is electronic these days, so the use of paper notes is incidental, but the Federal Reserve prints money nevertheless.

    2. The creation of money. Money is actually created chiefly by private banks. The new money enters circulation via issue as bank loans: when the bank lends you a dollar, a dime of that dollar is money the bank possesses because a depositor has deposited it; the other 90 cents are just made up by the bank out of thin air. The first dime is significant, though: the Federal Reserve requires the dime to restrain the bank from issuing infinite loans.

    3. The creation of nonexistent money. But how can a bank make up the 90 cents out of thin air? The answer is, they just record the 90 cents in your checking account. That's it. The bank just writes the number down and, hey presto, you have money available to spend. “Available to spend” means that, if you write a check against the money in question, and the check's recipient presents it at the bank for payment, then the bank strikes the money from your account and adds it to their account.

    4. Propriety. But can a bank do that? They still don't have the 90 cents, right? So where do the 90 cents come from? I fear that the only answer is the baseball umpire's answer, for the umpire is by empowered by rule to issue, not money, but runs to each of the visiting and home teams. He didn't bring the runs with him in his pocket to the ball park that morning, but just made the runs up during the game and, as it were, added the runs to the teams' respective accounts.

    5. Currency notes. Twenty-dollar bills and such are incidental to the bank. The bank can order a case of twenty-dollar bills, delivered via an armored car, from its local Federal Reserve branch, but that's for your convenience, not the bank's. The bank doesn't care about currency notes as such.

    6. The other creation of money. Notwithstanding the aforementioned bank mechanism, federal law also allows the Federal Reserve as such to print money on its own. However, until recently, the Federal Reserve was constrained by law to use the printed money solely to buy U.S. debt on the open market. Here is how that works: [a] you, as a private person, lend the U.S. money by buying a Treasury note (or, alternately, the Chinese government lends the U.S. money by buying such a Treasury note, etc.); [b] before the note matures, you sell the note via your stock broker on the open market; [c] maybe a private person buys your immature note, but the Federal Reserve might be the buyer, paying you using the very money the Federal Reserve has just printed.

    7. Bidding up the price. Why does the last matter? Answer: because the entry of the Federal Reserve into the market for immature bonds bids up the price of immature Treasury notes, making immature notes less attractive to private buyers than those bonds would otherwise be. The last encourages private buyers to buy new notes rather than existing ones, even if the interest rate the Treasury notes promise is low.

    8. Low rates. But if the interest rate Treasury notes promise is so low, why don't private buyers buy corporate or foreign bonds, instead? Empirically, this isn't really an issue, because some Americans for various reasons of their own prefer an undefaultable federal bond in any case, especially when those Americans can turn right around and sell the bond to the Federal Reserve on the open market any time they want; but if it were an issue then Congress would make up the shortfall via taxation or, if Congress preferred, by granting the Federal Reserve extra powers or emergency powers as during 2020. One way or another, the money is going to get printed; and one way or another, a sufficient share of the printed money is going to land in the U.S. Treasury. The mechanism described in points 1 through 7 has thus far sufficed.

    9. Running out of money. But where do the private buyers get the money to lend? Don't they eventually run out? The answer is, no, because the Federal Reserve is continuously injecting new money via the aforementioned open-market purchase of immature bonds. The Federal Reserve can inject as much new money as it takes, until the money makes its way through the channels of commerce to the lenders.

    Got that? Money is printed, then injected into the economy as loans or via the Fed's purchase of immature bonds. Admittedly, unless you already know at least half the story, it's nearly impossible to take in at one sitting, but ...

    In simple to understand terms, ...
     
    ... well, I'm doing the best I can.

    10. Maturity. When immature notes the Federal Reserve has bought finally mature, the Treasury pays the Federal Reserve the notes' principal plus the originally promised interest. But where does the Treasury get the money to pay? Answer: partly from tax revenue; partly from the issue of new notes. Because of point 8 above, the money with which to repay never runs out.

    11. Distribution of profits. Upon receipt, the Federal Reserve just destroys the principal. The interest however is split into two funds: about 30 percent (if I read the financials correctly) is paid to the private banks that formally own the Federal Reserve as dividends; the other 70 percent, after the Federal Reserve's institutional operating costs are subtracted, is simply handed over to the U.S. Treasury.

    12. Fiat. One point that frequently confuses people is why the dollar has the special status it enjoys. If the dollar, then why not Bitcoin or Ethereum? What is to stop citizens from transacting in some other currency and leaving the dollar busted? The answer however is straightforward: you cannot pay your taxes using Bitcoin or Ethereum. Even if you pay no taxes, the vendors from whom you buy pay taxes. They require dollars to pay. This is the chief reason the dollar has fiat.

    I won't try to delve deeply into the question of whether the foregoing structure is wise. The structure has been stable for a long time, though, so one is reluctant to fiddle too much with it; and it has at least the virtue that it injects money into circulation, not at any one concentrated point, but by an insensible general seepage, operating simultaneously in every city and town in the United States, so long as the town has a bank branch or, better yet, a local bank. So, yes, it's not a bad system on the whole.

    Which finally brings us to your question:

    ... what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn't really matter.

    Now, none of the foregoing is meant to excuse profligate fiscal policy. The printing of money creates no new wealth, but merely affords the Treasury cash with which to commandeer as much of the national wealth as the federal government may require, at private citizens' expense. By “wealth,” I mean goods and services. For example, if the government adds another thousand Ford sedans to its fleet this year, then that means (approximately) that a thousand citizens who would rather be driving new sedans will have to make do with their old sedans another year. It means, generally, that prices rise and/or wages fall.

    This has been a long answer, though hopefully no longer than necessary. Since the answer interests me at least, I thank you for affording me the excuse to write it! Perhaps the answer will interest someone else, as well.

    Meanwhile, I believe that I grasp the point that AE is making about the Fed's support of asset prices via zero interest rates. It is a sophisticated point and I think that you should give it careful consideration. However, I do not believe that, in and of itself, it portends the macroeconomical armageddon AE believes it does.

    Replies: @Buzz Mohawk, @anonymous, @Citizen of a Silly Country, @Daniel H

    , @Daniel H
    @anonymous


    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    I'll bet that some think they can, and we are likely to find out that Fed cannot keep playing this con.

    The con's endgame is as follows: Nobody -neither friend foe, foreign or domestic - will buy US debt to fund US commitments. Ordinarily, that would be enough to doom the regime, but to keep the con going the Fed directs its owners (the major commercial banks) to "buy" the debt. A month of two later the Fed exchanges that debt for dollars, swelling its balance sheet even further. Repeat, repeat, repeat.

    There you have it. Some think that this con can go on, indefinitely, against all historical evidence. Krugman is always blathering out that the Federal deficit doesn't matter because we owe the money to ourselves. I have no idea as to the point that he makes. Anyway, we shall see how things go, that's for sure.

    Replies: @Miro23

  3. Economics writer Jeffrey P Snider of Alhambra and Real Clear Markets – who has been astonishingly correct, year after year, prediction after prediction – once again cautions against excessive sentiment that the ‘dollar is dying’

    As Snider notes, ever since 2007 we see the same pattern … dollar falling, predictions of crisis … but then the pullback and stronger dollar again

    The difference being that ‘money printing’ is offset by black-hole implosion of credit in the international system of credit known misleadingly by the term ‘eurodollar’ – meaning the function of primarily the dollar but also other currencies, outside of their home countries, controlled by no central bank, having a life of its own, the realm in which most financial ‘credit’ actually thrives or expires, and in which various forces produce up-down cycle waves

    Ironically there is still internationally a ‘shortage of money’ – even a ‘shortage of dollars’ – in credit terms (this is not easy to grasp) … and we will see this as the dollar bumps up in value again as the Snider-described cycle continues

    But maybe one day, as reggae star Peter Tosh anticipated in 1979 in his great song, we will see ‘The Day the Dollar Die’

    • Thanks: Marshal Marlow
  4. Using accounting tricks, massive social molding through media et al. , deceit and whispering to the upper middle classes that they are not going to be part of the dump, this is not going to be genius, but brute forcing! And it is going to work! Globally, it must, Putin nor Xi have not anything different to offer.

    Real sources for the end results of hard assets and energy are not growing, the Iron Ball is not getting any bigger. The meat-ball of human synthetics does. I wonder, how anybody can even conceive a two dimensional equivalent for value(money) (not including the element of time) can be credible.

    The low end: the Haiti crowds eat dirt, what´s wrong with the global population eating dirt, be it industrially tainted? What Haitians can do, the Feds can make do?! Quanting in the surreal! The “real” will come around.

    Great take of our author, then why dipping in the same “quantary data” pool of mud to make contrary arguments. Last time I looked, the data were toxic to any kind of rational argument.

  5. @Buzz Mohawk
    Gold is real and immutable. Doggy coins are neither.

    In China, India and other old places, gold is as popular as ever. It is far more a part of their traditions than ours, and it is very popular. There is your market.

    My money in on (and in) gold.

    BTW, its price is being artificially held down via the usual financial paper tricks. In its real, physical form, it is still finite -- and more people than there are of us value it for what it is. That is not about to change.

    Replies: @Chrisnonymous, @Yellowface Anon

    Do you own physical gold or pieces of paper that say you purchased gold existing somewhere? Indians really like having physical gold. Around their necks, hanging from their ears, woven into their clothing, etc. Kind of like black rappers.

    I would like to have physical gold, but I worry about storing it safely. You have to keep in your abode or it isn’t really yours. But if you keep it, your wealth is liable to be stolen or lost in a conflagration, etc. This is how banks started, I imagine, but I wouldn’t trust a bank today.

    • Replies: @Achmed E. Newman
    @Chrisnonymous

    I can't speak directly for Mr. Mohawk, but it was clear to me, Chris, that he meant physical gold.

    Your 2nd paragraph is going in the right direction, but just put a little more thought into storage. (The prepper sites are usually pretty good on this.*) There are ways of working it out - being secure from governments and individuals but also secure enough from natural loss. Joe Biden, for example - he would be better off not hiding a stash of gold in some spot back in his yard he'll remember later...


    .

    * Just in case Ron Unz is reading or skimming, I ask again, how about getting a prepper columnist on here, Mr. Unz? He would be really appreciated by those of us who enjoy the excellent commenting systems. There is a hell of a lot to discuss in probably not that long a time anymore.

    Replies: @Hapalong Cassidy

    , @Buzz Mohawk
    @Chrisnonymous


    Do you own physical gold or pieces of paper that say you purchased gold existing somewhere?
     
    Physical, and for a long time. My first purchase was four, one-ounce Canadian Gold Maple Leaf coins, when I made some extra money while still in college in the 1980s. I kept them in my sock drawer.


    https://redtea.com/wp-content/uploads/2019/01/GoldMapleLeaf900x523.jpg

    , @Magic Dirt Resident
    @Chrisnonymous

    If it's not physical gold/silver then it's not yours.

    I highly recommend getting to know a coin dealer in your area. They give much better prices than JM bullion or online stores and they have an incredible depth of knowledge. Plus they are usually based and very fun to talk to.

  6. I’ll give you credit for setting out your stall, AE.

    You already know where my forecast (such as it is) differs from yours. You know my reasons, too, so I’ll not bore you by repeating the reasons today, but rather challenge a different point.

    Labor is a cost.

    Does labor not fundamentally differ from every other cost, though? One wants every other cost to decline, precisely to provide headroom for the cost of labor to rise—for the rising cost of labor has another, more sociable name: rising wages.

    • Agree: iffen, YetAnotherAnon
  7. @Buzz Mohawk
    Gold is real and immutable. Doggy coins are neither.

    In China, India and other old places, gold is as popular as ever. It is far more a part of their traditions than ours, and it is very popular. There is your market.

    My money in on (and in) gold.

    BTW, its price is being artificially held down via the usual financial paper tricks. In its real, physical form, it is still finite -- and more people than there are of us value it for what it is. That is not about to change.

    Replies: @Chrisnonymous, @Yellowface Anon

    What the lights go out, cryptos go poof.

    • Agree: Unit472, Buzz Mohawk, Miro23
    • Replies: @Buzz Mohawk
    @Yellowface Anon


    What the lights go out, cryptos go poof.
     
    Yes, and so does "paper" gold, which is really electronic now and as imaginary as stocks and cryptocurrencies.

    Which would you rather have, a real girl, or an image of a girl on a screen? On second thought, don't answer that, because I realize some guys now would prefer the latter. LOL.

    Replies: @Arclight

  8. The labor force participation rate, after rebounding from its Covid nadir, appears to have settled at a low level not seen since the late 1970s. Proto-UBI in the forms of extended unemployment, eviction moratoriums, and the like are politically unrescindable. There is thus no reason to expect employment to return to pre-Covid levels. The low-end labor shortages apparent throughout the economy aren’t ending, either.

    Not without big increases in wages, anyway. Labor is a cost. It costs businesses significantly more to operate today than it did 18 months ago. Those costs are in the process of manifesting in higher prices for everything from haircuts to a hamburgers.

    These effective labor shortages are accompanied by increasing goods shortages at every point in the supply chain. Nearly all commodity prices are trending upwards.

    Just ask Martin Armstrong and a bunch of other libertarians if these are intentional or not. Rather than being crushed by its own weight, (post)industrial economy is being demolished by the elites.

    We still have a long way down to the bottom (more than a dozen years, Armstrong says). Be sure to have your own plot of land.

  9. In my world (real estate development) we are seeing soaring costs/shortages of material and a slow but steady rise in interest rates, which largely go off the 10 year Treasury. We are starting to see larger single family builders and market rate apartment developers starting to cancel or shelve planned projects because the numbers just don’t work like they did even 6 months ago. Cap rates on multifamily sales are very low right now as investors obviously feel putting money into this sector right now is going to have a lot of upside in the years ahead.

  10. I’ve been away from this blog for quite a while, with only so many hours in the day. I could not pass up this financial stupidity post, though. I know this is not your bread & butter as far as this blog goes, A.E., but I agree with you completely about the financial situation we are in here.

    I agree completely on this post, but what I’d like to add here is an explanation of what kind of trouble the American economy would be in if the FED did let interest rates rise to their natural level (i.e. the asking price for money):

    1) Were people able to keep their wealth, at least getting enough return to beat inflation, which is running at closer to 4-5% than the BLS BS 1-2% numbers, the stock market would crash. The stock market has individuals’ 401 (k)s and much of regular American’s “wealth” other than their houses. People feel forced into the stock market due to it being the only investment giving decent returns (cause “they” are making sure it always goes up). However, it IS risky, but it’s the only choice. Were CD’s giving 6% back, little old ladies with a quarter million in savings could get another $1,250 monthly to supplement their SS, rather than the less than 200 dollars you’d get now. So, the money goes into these funds now.

    2) The US Feral budget would be seen as the sham it is, were the rates to go up to 6, 7% or so. It’s not like this is all hidden – Peak Stupidity has just this post from the ’19 pie charts from the IRS – EXTRA, EXTRA, IRS tells all! (in .pdf 1040 Instructions) now, but coming shortly* we’ll have a run-down from the last 10 or 20 years or so.

    If interest rates went from the 1.6% net average interest rates (now) to 7% on the Treasury bonds that support the Fed-gov, 35% of the outlays would be for interest, instead of the 8% today. It was 6 % only a couple of years ago. Peak Stupidity just compared ’19 to ’15, with an excerpt after the [MORE] tag.

    Hey, it’s not rocket surgery, and the numbers are (amazingly) still there for us. Anyone else here even look at the IRS 1040 instruction book, or is just me? ;-}

    .

    * That means maybe today, maybe next week.

    [MORE]

    These numbers are only to the nearest percent, but taking them for what we see, the net interest on the Federal debt has gone up by 33%, from 6% to 8%. This interest is being paid on a larget pie too. We calculated in the first post, with only the ’15 pie chart, that the (also) 6% of that ’15 outlays of $3.89 Trillion = $220 Billion, being paid on ~ $17 Trillion, gave an average interest rate of a low, low 1.2 – 1.3% being paid by the feds. (Is that the average rate for Treasury Bonds being redeemed? I don’t know enough to state this categorically.) OK, so that 8% of the ’19 outlays of $4.49 Trillion = $360 Billion. On a ’19 end-of-year deficit of ~ $22 Trillion gives an average interest rate of 1.6%. Interesting… no pun intended.

    The absolute amount of interest paid in ’19, that $360 Billion is 63% higher than that $220 Billion in ’15, an additional $140 Billion. Just that amount of additional interest is more than the Total US Debt amount in 1943, in the middle of WWII! Oh, but a buck isn’t worth nearly as much, so why compare? That’s one point of this all, pointing out that the US dollar is being made worthless. The other is that the FED is in, or has put the Treasury Department in, a real pickle. If the interest rates were let to rise to natural levels, the price of money, the whole budget collapses. Imagine rates of 7%, likely only 3 points above the REAL inflation level. That’s 4 3/8 times the interest, meaning that 8% of the pie goes to 35% of outlays!

    • Replies: @Rosie
    @Achmed E. Newman


    Were CD’s giving 6% back, little old ladies with a quarter million in savings could get another $1,250 monthly to supplement their SS, rather than the less than 200 dollars you’d get now.
     
    Won't someone please think of the little old ladies with a quarter million dollars in the bank? Nevermind the young couple trying to figure out how they're going to pay their mortgage, student loans, and daycare expenses all at the same time.
  11. @Chrisnonymous
    @Buzz Mohawk

    Do you own physical gold or pieces of paper that say you purchased gold existing somewhere? Indians really like having physical gold. Around their necks, hanging from their ears, woven into their clothing, etc. Kind of like black rappers.

    I would like to have physical gold, but I worry about storing it safely. You have to keep in your abode or it isn't really yours. But if you keep it, your wealth is liable to be stolen or lost in a conflagration, etc. This is how banks started, I imagine, but I wouldn't trust a bank today.

    Replies: @Achmed E. Newman, @Buzz Mohawk, @Magic Dirt Resident

    I can’t speak directly for Mr. Mohawk, but it was clear to me, Chris, that he meant physical gold.

    Your 2nd paragraph is going in the right direction, but just put a little more thought into storage. (The prepper sites are usually pretty good on this.*) There are ways of working it out – being secure from governments and individuals but also secure enough from natural loss. Joe Biden, for example – he would be better off not hiding a stash of gold in some spot back in his yard he’ll remember later…

    .

    * Just in case Ron Unz is reading or skimming, I ask again, how about getting a prepper columnist on here, Mr. Unz? He would be really appreciated by those of us who enjoy the excellent commenting systems. There is a hell of a lot to discuss in probably not that long a time anymore.

    • Agree: Buzz Mohawk, Catdog
    • Replies: @Hapalong Cassidy
    @Achmed E. Newman

    I think Lewrockwell has a regular prepper that they post and link to. I can’t remember much else about her, except it’s a her.

    Replies: @Achmed E. Newman, @Achmed E. Newman, @Daniel H, @Hapalong Cassidy

  12. Gold is considered a collectible and the IRS levies a 28 percent tax on realized gains not the 15 percent capital gains tax. That takes some of the luster off gold.

    Bitcoin is not now nor will it ever be money. Central banks wont allow their monopoly on making monetary policy to pass into some crypto exchange. Crypto is also too volatile to be money. Something whose ‘value’ in fiat currency terms fluctuates by several percent on a daily basis is useless as a medium of exchange. That it can and probably will be outlawed (see gold in 1933) suggests holders of crypto will end up holding nothing.

    • Agree: V. K. Ovelund
    • Replies: @Achmed E. Newman
    @Unit472


    Gold is considered a collectible and the IRS levies a 28 percent tax on realized gains ...
     
    It's not my main point, but are you sure that's the case on US "50 dollar" gold eagle coins, Unit?

    Here's my main point: Anyone who understands gold realizes no gains at all. An ounce of gold is an ounce of gold, no matter how many pieces of dirty green paper one can get for it.

    Crypto is not the store of wealth that precious metals are, but it sure is great for transferring money around. That's what governments HATE HATE HATE [/Whiskey] about it.
  13. @Unit472
    Gold is considered a collectible and the IRS levies a 28 percent tax on realized gains not the 15 percent capital gains tax. That takes some of the luster off gold.

    Bitcoin is not now nor will it ever be money. Central banks wont allow their monopoly on making monetary policy to pass into some crypto exchange. Crypto is also too volatile to be money. Something whose ‘value’ in fiat currency terms fluctuates by several percent on a daily basis is useless as a medium of exchange. That it can and probably will be outlawed (see gold in 1933) suggests holders of crypto will end up holding nothing.

    Replies: @Achmed E. Newman

    Gold is considered a collectible and the IRS levies a 28 percent tax on realized gains …

    It’s not my main point, but are you sure that’s the case on US “50 dollar” gold eagle coins, Unit?

    Here’s my main point: Anyone who understands gold realizes no gains at all. An ounce of gold is an ounce of gold, no matter how many pieces of dirty green paper one can get for it.

    Crypto is not the store of wealth that precious metals are, but it sure is great for transferring money around. That’s what governments HATE HATE HATE [/Whiskey] about it.

  14. I’ve seen the labor shortages from the government subsidizing people to not work affect my daily life. My nearest barbershop normally has four barbers and now only has two so it’s harder to just walk in and get a haircut. I went to get some auto repairs done. I was told they only had one technician and he didn’t show up for work that day. I made an appointment at another shop. When I tried to get a taxi home while my car was being repaired I found I couldn’t get one so I decided to walk home. While walking home I fell, hit my head, and had to go to the emergency room of a hospital. I then started investigating how to use Uber or Lyft after I got home. I see, though, they are also having trouble getting drivers due to stimulus checks and unemployment benefits:

    https://www.businessinsider.com/why-uber-lyft-expensive-taking-long-driver-shortage-2021-4

    In addition to government induced labor shortages leading to less availability of goods and services, the inflation will also lead to even more of it. When inflation really takes off the voters will start calling for government price controls. Demand will then exceed supply, followed either by shortages or by rationing of goods and services. The voters who have voted for the bad economic policies up to this point aren’t going to suddenly become wise and balk at price controls. They will be all for them. I’m 64 and have never seen anything like this level of economic irrationality in my life and it’s a little bit frightening.

    • Thanks: Achmed E. Newman
    • Replies: @Dumbo
    @Mark G.


    I’ve seen the labor shortages from the government subsidizing people to not work affect my daily life. My nearest barbershop normally has four barbers and now only has two so it’s harder to just walk in and get a haircut.

     

    Is it hapenning because of stimulus checks or just because Covid reduction in business and the whole economic downturn?

    It seems to me that most people would be happy to try to keep both the stimulus check, PLUS the money they can get from working, but what do I know.

    Anyway, I think that this (as everything else really) is pushed by big companies such as Amazon, etc. Perhaps they reached a point where it is more profitable to them to use robots and drones as their main workforce, and it's more cost-effective to pay people to just stay at home (actually, the government/taxpayer pays them, not them), not as workers but merely consumers, ordering Amazon products and watching Amazon entertainment with the stimulus check (win-win for them).


    I went to get some auto repairs done. I was told they only had one technician and he didn’t show up for work that day. I made an appointment at another shop. When I tried to get a taxi home while my car was being repaired I found I couldn’t get one so I decided to walk home. While walking home I fell, hit my head, and had to go to the emergency room of a hospital.
     
    You seem unlucky. ;) Or it was just a bad bay.

    Replies: @Achmed E. Newman

    , @DanHessinMD
    @Mark G.

    The left can end the irrationality on the economy in an instant just as they can on crime, by starting to tell the truth.

    Unfortunately, they have a belief system in which social falsehoods are the main tenets.

  15. The Finance, Insurance, Real Estate — FIRE — sector of the rigged fraud money-grubber system must be imploded with extreme prejudice.

    Some of the most disgusting money-grubbing treasonites are involved in the FIRE sector of the globalized money-grubber racket and they are the sleazy rodentine scum who are clam raking big loot out of the monetary extremism of the globalized central banker shysters.

    Raise the federal funds rate to 6 percent and stop the government debt asset purchases of the Fed and stop the Fed from using electronically conjured up cash to purchase all the mortgage-backed securities. No more Fed dollar swaps or Fed balance sheet ballooning or Fed jawboning or any other fed monetary policy crud.

    NATIONALIZE THE FEDERAL RESERVE BANK NOW!

    No more intermediator dirtbags grabbing loot by way of the Fed laundering currency units through the FIRE sector. Direct conjured up loot portions now. Then regular White Core Americans can begin to build intelligence agencies and military structures and propaganda structures to decapitate the evil and treasonous JEW/WASP Ruling Class of the American Empire.

    Pewitt Conjured Loot Portion(PCLP) Now!

    The Pewitt Conjured Loot Portion(PCLP) will pay each American who has all blood ancestry born in colonial America or the USA before 1924 a cool ten thousand dollars a month. The US Treasury and the Federal Reserve Bank shall work together to conjure up the cash out of thin air, just like the ruling class is doing now.

    Fed Chairman Powell uses the word “digitally” but I like using the word electronically because that word more accurately describes the circumstance of the conjuring up of the currency units and people understand that when you get an ale or a beer from the fridge the light comes on magically or electronically.

    Get the population of the USA down to 220 million like it was in 1978 by immediate deportation of the upwards of 30 million illegal alien invaders in the USA and then remove all resident aliens and then use citizenship revocations to remove as many foreigners and the spawn of foreigners as you can.

    The current asset bubbles in stocks and bonds and real estate are the biggest ever and they are bubbling and they will pop and that will be the time to use legal means to decapitate the evil and treasonous Jew/WASP Ruling Class of the American Empire.

    • Replies: @Achmed E. Newman
    @Charles Pewitt

    How about F.I.R.E. as Finance, Insurance, Real Estate, and Education? They don't make up a REAL economy.

  16. Will dollar stores still exist when the Tubman twenty debuts? (estimated 2030, as it takes time to design security features.)

  17. • Replies: @Ian Smith
    @Charles Pewitt

    I don’t think the Jefferson quote is legit:

    https://www.monticello.org/site/research-and-collections/private-banks-spurious-quotation

  18. How do people feel about silver?

    I’m a fan of spreading things out: digital currency, gold, silver and strange investments.

  19. @Yellowface Anon
    @Buzz Mohawk

    What the lights go out, cryptos go poof.

    Replies: @Buzz Mohawk

    What the lights go out, cryptos go poof.

    Yes, and so does “paper” gold, which is really electronic now and as imaginary as stocks and cryptocurrencies.

    Which would you rather have, a real girl, or an image of a girl on a screen? On second thought, don’t answer that, because I realize some guys now would prefer the latter. LOL.

    • Replies: @Arclight
    @Buzz Mohawk

    I have maybe $20K in platinum, gold, and silver coins - have definitely been thinking about adding to that recently.

    Replies: @Buzz Mohawk

  20. @anonymous
    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?

    Replies: @V. K. Ovelund, @Daniel H

    I am no economist but an amateur who has taken a decades-long interest and has even read a little of the professional economic literature (written by economists for an audience of economists), so you can take my answer for what it’s worth.

    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?

    A digression is necessary to review the subtle mechanism by which new money is injected into circulation. If you already know the mechanism, then you can skip to the bottom.

    [MORE]

    1. The printing of money. The Federal Reserve prints money. The printing is electronic these days, so the use of paper notes is incidental, but the Federal Reserve prints money nevertheless.

    2. The creation of money. Money is actually created chiefly by private banks. The new money enters circulation via issue as bank loans: when the bank lends you a dollar, a dime of that dollar is money the bank possesses because a depositor has deposited it; the other 90 cents are just made up by the bank out of thin air. The first dime is significant, though: the Federal Reserve requires the dime to restrain the bank from issuing infinite loans.

    3. The creation of nonexistent money. But how can a bank make up the 90 cents out of thin air? The answer is, they just record the 90 cents in your checking account. That’s it. The bank just writes the number down and, hey presto, you have money available to spend. “Available to spend” means that, if you write a check against the money in question, and the check’s recipient presents it at the bank for payment, then the bank strikes the money from your account and adds it to their account.

    4. Propriety. But can a bank do that? They still don’t have the 90 cents, right? So where do the 90 cents come from? I fear that the only answer is the baseball umpire’s answer, for the umpire is by empowered by rule to issue, not money, but runs to each of the visiting and home teams. He didn’t bring the runs with him in his pocket to the ball park that morning, but just made the runs up during the game and, as it were, added the runs to the teams’ respective accounts.

    5. Currency notes. Twenty-dollar bills and such are incidental to the bank. The bank can order a case of twenty-dollar bills, delivered via an armored car, from its local Federal Reserve branch, but that’s for your convenience, not the bank’s. The bank doesn’t care about currency notes as such.

    6. The other creation of money. Notwithstanding the aforementioned bank mechanism, federal law also allows the Federal Reserve as such to print money on its own. However, until recently, the Federal Reserve was constrained by law to use the printed money solely to buy U.S. debt on the open market. Here is how that works: [a] you, as a private person, lend the U.S. money by buying a Treasury note (or, alternately, the Chinese government lends the U.S. money by buying such a Treasury note, etc.); [b] before the note matures, you sell the note via your stock broker on the open market; [c] maybe a private person buys your immature note, but the Federal Reserve might be the buyer, paying you using the very money the Federal Reserve has just printed.

    7. Bidding up the price. Why does the last matter? Answer: because the entry of the Federal Reserve into the market for immature bonds bids up the price of immature Treasury notes, making immature notes less attractive to private buyers than those bonds would otherwise be. The last encourages private buyers to buy new notes rather than existing ones, even if the interest rate the Treasury notes promise is low.

    8. Low rates. But if the interest rate Treasury notes promise is so low, why don’t private buyers buy corporate or foreign bonds, instead? Empirically, this isn’t really an issue, because some Americans for various reasons of their own prefer an undefaultable federal bond in any case, especially when those Americans can turn right around and sell the bond to the Federal Reserve on the open market any time they want; but if it were an issue then Congress would make up the shortfall via taxation or, if Congress preferred, by granting the Federal Reserve extra powers or emergency powers as during 2020. One way or another, the money is going to get printed; and one way or another, a sufficient share of the printed money is going to land in the U.S. Treasury. The mechanism described in points 1 through 7 has thus far sufficed.

    9. Running out of money. But where do the private buyers get the money to lend? Don’t they eventually run out? The answer is, no, because the Federal Reserve is continuously injecting new money via the aforementioned open-market purchase of immature bonds. The Federal Reserve can inject as much new money as it takes, until the money makes its way through the channels of commerce to the lenders.

    Got that? Money is printed, then injected into the economy as loans or via the Fed’s purchase of immature bonds. Admittedly, unless you already know at least half the story, it’s nearly impossible to take in at one sitting, but …

    In simple to understand terms, …

    … well, I’m doing the best I can.

    10. Maturity. When immature notes the Federal Reserve has bought finally mature, the Treasury pays the Federal Reserve the notes’ principal plus the originally promised interest. But where does the Treasury get the money to pay? Answer: partly from tax revenue; partly from the issue of new notes. Because of point 8 above, the money with which to repay never runs out.

    11. Distribution of profits. Upon receipt, the Federal Reserve just destroys the principal. The interest however is split into two funds: about 30 percent (if I read the financials correctly) is paid to the private banks that formally own the Federal Reserve as dividends; the other 70 percent, after the Federal Reserve’s institutional operating costs are subtracted, is simply handed over to the U.S. Treasury.

    12. Fiat. One point that frequently confuses people is why the dollar has the special status it enjoys. If the dollar, then why not Bitcoin or Ethereum? What is to stop citizens from transacting in some other currency and leaving the dollar busted? The answer however is straightforward: you cannot pay your taxes using Bitcoin or Ethereum. Even if you pay no taxes, the vendors from whom you buy pay taxes. They require dollars to pay. This is the chief reason the dollar has fiat.

    I won’t try to delve deeply into the question of whether the foregoing structure is wise. The structure has been stable for a long time, though, so one is reluctant to fiddle too much with it; and it has at least the virtue that it injects money into circulation, not at any one concentrated point, but by an insensible general seepage, operating simultaneously in every city and town in the United States, so long as the town has a bank branch or, better yet, a local bank. So, yes, it’s not a bad system on the whole.

    Which finally brings us to your question:

    … what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?

    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn’t really matter.

    Now, none of the foregoing is meant to excuse profligate fiscal policy. The printing of money creates no new wealth, but merely affords the Treasury cash with which to commandeer as much of the national wealth as the federal government may require, at private citizens’ expense. By “wealth,” I mean goods and services. For example, if the government adds another thousand Ford sedans to its fleet this year, then that means (approximately) that a thousand citizens who would rather be driving new sedans will have to make do with their old sedans another year. It means, generally, that prices rise and/or wages fall.

    This has been a long answer, though hopefully no longer than necessary. Since the answer interests me at least, I thank you for affording me the excuse to write it! Perhaps the answer will interest someone else, as well.

    Meanwhile, I believe that I grasp the point that AE is making about the Fed’s support of asset prices via zero interest rates. It is a sophisticated point and I think that you should give it careful consideration. However, I do not believe that, in and of itself, it portends the macroeconomical armageddon AE believes it does.

    • Thanks: iffen, Audacious Epigone
    • Replies: @Buzz Mohawk
    @V. K. Ovelund

    Yours is an excellent explanation!

    However, it needs more emphasis on the inflationary effects of the system. This means not only the commandeering of wealth by government, as you say, but also the placing of too many of those 90%-instant, fractional-reserve dollars into citizens' hands via easy lending, thus driving up prices.

    College tuitions and home prices are two good examples of how this happens.

    Replies: @V. K. Ovelund

    , @anonymous
    @V. K. Ovelund


    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn’t really matter.
     
    That simply sounds too good to be true. The US government can run $5 trillion or whatever deficits indefinitely without serious repercussions?

    Replies: @V. K. Ovelund

    , @Citizen of a Silly Country
    @V. K. Ovelund

    You should read or listen to Richard Werner. His empirical investigation showed that banks don't run strictly to the fractional reserve theory.

    In essence, when the bank gives you a loan, it doesn't actually give you the money. It gives you a promise to pay the money - accounts payable, not money. The bank gets an asset, your promise to pay them back - accounts receivable.

    He argues - and I could be getting this wrong so read for yourself - that the banks are not constrained by their fractional reserves due to how their accounting works.

    Replies: @V. K. Ovelund

    , @Daniel H
    @V. K. Ovelund

    This is an excellent summary of the money cycle. Thanks for writing it up. This is the closest thing to sense of this phenomenon that I have ever read. I'm going to save this and send it to lots of people who wonder how the logistics of our money policy works.

  21. @Charles Pewitt
    The Finance, Insurance, Real Estate -- FIRE -- sector of the rigged fraud money-grubber system must be imploded with extreme prejudice.

    Some of the most disgusting money-grubbing treasonites are involved in the FIRE sector of the globalized money-grubber racket and they are the sleazy rodentine scum who are clam raking big loot out of the monetary extremism of the globalized central banker shysters.

    Raise the federal funds rate to 6 percent and stop the government debt asset purchases of the Fed and stop the Fed from using electronically conjured up cash to purchase all the mortgage-backed securities. No more Fed dollar swaps or Fed balance sheet ballooning or Fed jawboning or any other fed monetary policy crud.

    NATIONALIZE THE FEDERAL RESERVE BANK NOW!

    No more intermediator dirtbags grabbing loot by way of the Fed laundering currency units through the FIRE sector. Direct conjured up loot portions now. Then regular White Core Americans can begin to build intelligence agencies and military structures and propaganda structures to decapitate the evil and treasonous JEW/WASP Ruling Class of the American Empire.

    Pewitt Conjured Loot Portion(PCLP) Now!

    The Pewitt Conjured Loot Portion(PCLP) will pay each American who has all blood ancestry born in colonial America or the USA before 1924 a cool ten thousand dollars a month. The US Treasury and the Federal Reserve Bank shall work together to conjure up the cash out of thin air, just like the ruling class is doing now.

    Fed Chairman Powell uses the word "digitally" but I like using the word electronically because that word more accurately describes the circumstance of the conjuring up of the currency units and people understand that when you get an ale or a beer from the fridge the light comes on magically or electronically.

    Get the population of the USA down to 220 million like it was in 1978 by immediate deportation of the upwards of 30 million illegal alien invaders in the USA and then remove all resident aliens and then use citizenship revocations to remove as many foreigners and the spawn of foreigners as you can.

    The current asset bubbles in stocks and bonds and real estate are the biggest ever and they are bubbling and they will pop and that will be the time to use legal means to decapitate the evil and treasonous Jew/WASP Ruling Class of the American Empire.

    https://twitter.com/NorthmanTrader/status/1390345067811024898?s=20

    Replies: @Achmed E. Newman

    How about F.I.R.E. as Finance, Insurance, Real Estate, and Education? They don’t make up a REAL economy.

  22. @Chrisnonymous
    @Buzz Mohawk

    Do you own physical gold or pieces of paper that say you purchased gold existing somewhere? Indians really like having physical gold. Around their necks, hanging from their ears, woven into their clothing, etc. Kind of like black rappers.

    I would like to have physical gold, but I worry about storing it safely. You have to keep in your abode or it isn't really yours. But if you keep it, your wealth is liable to be stolen or lost in a conflagration, etc. This is how banks started, I imagine, but I wouldn't trust a bank today.

    Replies: @Achmed E. Newman, @Buzz Mohawk, @Magic Dirt Resident

    Do you own physical gold or pieces of paper that say you purchased gold existing somewhere?

    Physical, and for a long time. My first purchase was four, one-ounce Canadian Gold Maple Leaf coins, when I made some extra money while still in college in the 1980s. I kept them in my sock drawer.

  23. A123 says:

    While not good, some of the problems are not as bad as they appear. The circular flow Fed to Treasury and back to Fed is a net zero. The actual deficit is a real problem but not an imminent fail.

    The way out of the problem is MAGA re-industrialization. The U.S. needs to makes more than it consumes. Any USD failure will be hard on savings, but mostly a non issue for those with little cash in the bank. A U.S. that is energy independent and ahead on material goods trade can survive currency redenomination. Eliminating the “reserve currency premium” trade penalty will actually spur manufacturing for export.
    _____

    Europe is much worse off. Negative Interest Rates and German austerity intransigence have pushed the ECB out on a limb that is bring sawed off. Because TARGET2 reports openly, every European citizen can see the vast wealth transfer to Frankfurt. And, the non-Germans are tired of being exploited.

    Merkel’s impending replacement, Armin Laschet, appears to share her economic arrogance and incompetence. It would be good if the September elections brought real change to Germany, but a Green/Linke led coalition would be only a mild improvement. The next 12 months could flip Austria, Italy, and France to Euroskeptic governance.

    The UK, post BREXIT, is economically outperforming the EU. And, BoJo’s government is pushing the EU under the bus. First, wholesale waivers keeping Northern Ireland integrated with the UK. Now, the UK is taking the terms of the accord for fishing literally. It is pretty easy to think of BoJo as a fool. Could he be luring his opponents into over confidence? Or, are these good things happening despite this presence?

    PEACE 😇

    • Agree: V. K. Ovelund
    • Replies: @Daniel H
    @A123


    The circular flow Fed to Treasury and back to Fed is a net zero.
     
    This circular flow is the very heart of the matter. Can it be sustained? How long can the world's largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?

    Replies: @V. K. Ovelund, @A123

  24. @anonymous
    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?

    Replies: @V. K. Ovelund, @Daniel H

    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?

    I’ll bet that some think they can, and we are likely to find out that Fed cannot keep playing this con.

    The con’s endgame is as follows: Nobody -neither friend foe, foreign or domestic – will buy US debt to fund US commitments. Ordinarily, that would be enough to doom the regime, but to keep the con going the Fed directs its owners (the major commercial banks) to “buy” the debt. A month of two later the Fed exchanges that debt for dollars, swelling its balance sheet even further. Repeat, repeat, repeat.

    There you have it. Some think that this con can go on, indefinitely, against all historical evidence. Krugman is always blathering out that the Federal deficit doesn’t matter because we owe the money to ourselves. I have no idea as to the point that he makes. Anyway, we shall see how things go, that’s for sure.

    • Replies: @Miro23
    @Daniel H


    The con’s endgame is as follows: Nobody -neither friend foe, foreign or domestic – will buy US debt to fund US commitments. Ordinarily, that would be enough to doom the regime, but to keep the con going the Fed directs its owners (the major commercial banks) to “buy” the debt. A month of two later the Fed exchanges that debt for dollars, swelling its balance sheet even further. Repeat, repeat, repeat.
     
    If interest rates on other currencies rise - which isn't so controllable - then there's automatically a problem.

    Dollar interest rates simply can't offer a matching rise because the interest payment burden would bankrupt big US debtors from the government on downwards.

    Conclusion, that US interest rates would stay low regardless, leaving the dollar (exchange rate) to take the strain. Loss of confidence in a currency starts slowly - but can quickly turn into an avalanche (example the Deutsche Mark and DM bonds in the early 1920's) = fast accelerating inflation.
  25. @Achmed E. Newman
    @Chrisnonymous

    I can't speak directly for Mr. Mohawk, but it was clear to me, Chris, that he meant physical gold.

    Your 2nd paragraph is going in the right direction, but just put a little more thought into storage. (The prepper sites are usually pretty good on this.*) There are ways of working it out - being secure from governments and individuals but also secure enough from natural loss. Joe Biden, for example - he would be better off not hiding a stash of gold in some spot back in his yard he'll remember later...


    .

    * Just in case Ron Unz is reading or skimming, I ask again, how about getting a prepper columnist on here, Mr. Unz? He would be really appreciated by those of us who enjoy the excellent commenting systems. There is a hell of a lot to discuss in probably not that long a time anymore.

    Replies: @Hapalong Cassidy

    I think Lewrockwell has a regular prepper that they post and link to. I can’t remember much else about her, except it’s a her.

    • Replies: @Achmed E. Newman
    @Hapalong Cassidy

    Haha, Mr. Cassidy, the only thing you remembered is wrong! (Just bustin' your balls here...). Lew Rockwell is a man, and it's short for Llewellyn. I've read him quite a bit, and though this site may link to his writing, Mr. Unz's commenting system kicks ass, so I'd just like to be able to write like I do here (with no registration BS either) under the columns of a guy like him.

    Thanks for the reply, Hapalong.

    Yes, Mr. Unz, get Lew Rockwell on here, STAT!

    , @Achmed E. Newman
    @Hapalong Cassidy

    Ahhh, crap, just read back over this and you said "HAS" a regular prepper not "IS". I thought you were referring to Lew Rockwell himself, who is more political minded guy, and that it was unz that linked to him.

    One big NEVER MIND and apology, Mr. Cassidy. So sorry for my confusion - none on your part.

    , @Daniel H
    @Hapalong Cassidy


    I think Lewrockwell has a regular prepper that they post and link to. I can’t remember much else about her, except it’s a her.
     
    Stock up on canned sardines (packed in olive oil only). Good, cheap, healthy protein. You can stock a year's worth in a pantry. Other protein sources can get mighty expensive, very fast.
    , @Hapalong Cassidy
    @Hapalong Cassidy

    Ok, I think this is her. Daisy Luther.

    https://www.lewrockwell.com/author/daisy-luther/?ptype=article

  26. @Daniel H
    @anonymous


    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    I'll bet that some think they can, and we are likely to find out that Fed cannot keep playing this con.

    The con's endgame is as follows: Nobody -neither friend foe, foreign or domestic - will buy US debt to fund US commitments. Ordinarily, that would be enough to doom the regime, but to keep the con going the Fed directs its owners (the major commercial banks) to "buy" the debt. A month of two later the Fed exchanges that debt for dollars, swelling its balance sheet even further. Repeat, repeat, repeat.

    There you have it. Some think that this con can go on, indefinitely, against all historical evidence. Krugman is always blathering out that the Federal deficit doesn't matter because we owe the money to ourselves. I have no idea as to the point that he makes. Anyway, we shall see how things go, that's for sure.

    Replies: @Miro23

    The con’s endgame is as follows: Nobody -neither friend foe, foreign or domestic – will buy US debt to fund US commitments. Ordinarily, that would be enough to doom the regime, but to keep the con going the Fed directs its owners (the major commercial banks) to “buy” the debt. A month of two later the Fed exchanges that debt for dollars, swelling its balance sheet even further. Repeat, repeat, repeat.

    If interest rates on other currencies rise – which isn’t so controllable – then there’s automatically a problem.

    Dollar interest rates simply can’t offer a matching rise because the interest payment burden would bankrupt big US debtors from the government on downwards.

    Conclusion, that US interest rates would stay low regardless, leaving the dollar (exchange rate) to take the strain. Loss of confidence in a currency starts slowly – but can quickly turn into an avalanche (example the Deutsche Mark and DM bonds in the early 1920’s) = fast accelerating inflation.

  27. @Hapalong Cassidy
    @Achmed E. Newman

    I think Lewrockwell has a regular prepper that they post and link to. I can’t remember much else about her, except it’s a her.

    Replies: @Achmed E. Newman, @Achmed E. Newman, @Daniel H, @Hapalong Cassidy

    Haha, Mr. Cassidy, the only thing you remembered is wrong! (Just bustin’ your balls here…). Lew Rockwell is a man, and it’s short for Llewellyn. I’ve read him quite a bit, and though this site may link to his writing, Mr. Unz’s commenting system kicks ass, so I’d just like to be able to write like I do here (with no registration BS either) under the columns of a guy like him.

    Thanks for the reply, Hapalong.

    Yes, Mr. Unz, get Lew Rockwell on here, STAT!

  28. @Hapalong Cassidy
    @Achmed E. Newman

    I think Lewrockwell has a regular prepper that they post and link to. I can’t remember much else about her, except it’s a her.

    Replies: @Achmed E. Newman, @Achmed E. Newman, @Daniel H, @Hapalong Cassidy

    Ahhh, crap, just read back over this and you said “HAS” a regular prepper not “IS”. I thought you were referring to Lew Rockwell himself, who is more political minded guy, and that it was unz that linked to him.

    One big NEVER MIND and apology, Mr. Cassidy. So sorry for my confusion – none on your part.

  29. @Hapalong Cassidy
    @Achmed E. Newman

    I think Lewrockwell has a regular prepper that they post and link to. I can’t remember much else about her, except it’s a her.

    Replies: @Achmed E. Newman, @Achmed E. Newman, @Daniel H, @Hapalong Cassidy

    I think Lewrockwell has a regular prepper that they post and link to. I can’t remember much else about her, except it’s a her.

    Stock up on canned sardines (packed in olive oil only). Good, cheap, healthy protein. You can stock a year’s worth in a pantry. Other protein sources can get mighty expensive, very fast.

  30. @A123
    While not good, some of the problems are not as bad as they appear. The circular flow Fed to Treasury and back to Fed is a net zero. The actual deficit is a real problem but not an imminent fail.

    The way out of the problem is MAGA re-industrialization. The U.S. needs to makes more than it consumes. Any USD failure will be hard on savings, but mostly a non issue for those with little cash in the bank. A U.S. that is energy independent and ahead on material goods trade can survive currency redenomination. Eliminating the "reserve currency premium" trade penalty will actually spur manufacturing for export.
    _____

    Europe is much worse off. Negative Interest Rates and German austerity intransigence have pushed the ECB out on a limb that is bring sawed off. Because TARGET2 reports openly, every European citizen can see the vast wealth transfer to Frankfurt. And, the non-Germans are tired of being exploited.

    Merkel's impending replacement, Armin Laschet, appears to share her economic arrogance and incompetence. It would be good if the September elections brought real change to Germany, but a Green/Linke led coalition would be only a mild improvement. The next 12 months could flip Austria, Italy, and France to Euroskeptic governance.

    The UK, post BREXIT, is economically outperforming the EU. And, BoJo's government is pushing the EU under the bus. First, wholesale waivers keeping Northern Ireland integrated with the UK. Now, the UK is taking the terms of the accord for fishing literally. It is pretty easy to think of BoJo as a fool. Could he be luring his opponents into over confidence? Or, are these good things happening despite this presence?

    PEACE 😇

    Boris Johnson Stuck on Zip Line (2012)

     
    https://i2-prod.mirror.co.uk/incoming/article1200478.ece/ALTERNATES/s1200/Mayor%20of%20London%20Boris%20Johnson%20after%20he%20gets%20stuck%20on%20a%20zip-line%20during%20BT%20London%20Live%20in%20Victoria%20Park

     
    http://a.abcnews.com/images/International/GTY_Boris_Johnson1_MEM_160714_4x3_992.jpg

    Replies: @Daniel H

    The circular flow Fed to Treasury and back to Fed is a net zero.

    This circular flow is the very heart of the matter. Can it be sustained? How long can the world’s largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?

    • Replies: @V. K. Ovelund
    @Daniel H

    This is the right question in my opinion:


    This circular flow is the very heart of the matter. Can it be sustained? How long can the world’s largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?
     
    Yes, there is a limit. It stops when foreigners, mainly Chinese, cease to accept paper IOUs (as you put it) in payment. It stops when international trade dedollarizes.

    The good news is that, in the worst case as far as I know, the result will be a 10.2-percent reduction in our material standard of living. Justification follows the break.

    MORE

    Dedollarization of international trade forces the United States to close the trade deficit, which before the pandemic ran at 2.9 percent of GDP (I gave the figure incorrectly last time: sources here, here and here.)

    Some have observed that U.S. GDP includes a lot of finance, insurance, administration and so on, which in many ways is not real, but even if you unreasonably exclude every last penny of that—and indeed, even if you exclude professional services such as accounting, architecture and engineering along with the entirety of retail trade and all information services, personal services, haircuts, groundskeeping and so on—well, you've just excluded 71.8 percent of GDP and even then the trade deficit only amounts to 10.2 percent of the rock-solid remainder.

    We won't particularly like taking a temporary 10.2-percent hit to our material standard of living, but we'll be all right.
    , @A123
    @Daniel H


    This circular flow is the very heart of the matter. Can it be sustained? How long can the world’s largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?
     
    You are mixing two very different things:

    -1- The Circular Flow between the Treasury and Fed, is a net ZERO between those two bodies.
    • The Treasury creates phantom securities that can only be bought and owned by the Fed.
    • The Fed creates phantom dollars that can only be used to buy those bespoke securities.

    Because this cycle nets to ZERO, it is psychological not monetary. There is no way Circular Dollars can exit the "TreasFed" for the purchase of real goods or services. As a non-monetary practice, there is no limit to how many zeros can be tacked on. The Circular Non-Debt and the Circular Non-Dollars are meaningless.

    -2- The real deficit is a problem that will cause USD to devalue at some point. However, once the Circular Non-Dollars are subtracted the fiscal picture is merely bad, not immediately disastrous. There is time for MAGA re-industrialization to boost the real goods economy in the U.S.

    When the USD slides -- Robust domestic resource extraction, energy production, and manufacturing will keep Citizen Workers afloat. Real value addition will fund what Citizens need to buy. The currency will change, but the value proposition based on re-industrialization will be solid.

    PEACE 😇

    Replies: @V. K. Ovelund

  31. uh, when was the last time money markets returned 5%? the mid 90s? money markets have been at like 1% for decades. this is below inflation. i last made 4% in 98 or 99.

    agree that the federal funds rate will NEVER got back up to even like 5%, let alone historical averages. it probably can’t go above 3% at most.

    it’s printing money from here on out, until something breaks. America is on it’s way to being over. the thing is, there is still an ASTRONOMICAL amount of demand for US dollars not even being met at 8 trillion, so that soaks up some of the damage from ludicrous overprinting. they could print another 8 trillion more and a billion third worlders would love to snatch up, have and use those US dollars. the serious problems start when US dollars are not redeemable for stuff. the inflation is less of a country breaking problem at this point.

    doubt any of the money going into crypto is money that would have went into gold instead. crypto is a young person’s game. old balls boomers who buy gold and silver don’t even understand how to buy crypto, let alone understand how it works. they’re baffled by it. crypto is making young people into millionaires, not boomers.

    • Replies: @Catdog
    @prime noticer


    doubt any of the money going into crypto is money that would have went into gold instead. crypto is a young person’s game. old balls boomers who buy gold and silver don’t even understand how to buy crypto, let alone understand how it works. they’re baffled by it. crypto is making young people into millionaires, not boomers.
     
    Hard disagree. There is a big crossover. I am young and put my crypto profits into PM. All the guys who hang out at the PM store are into crypto. My dad is a classic retarded boomer and he's the one who got me into crypto. And the 4chins PM threads are always full of people who own both PM and crypto.
  32. so, what’s the main issue then. when the yearly interest on the debt is so large that the US Treasury has to decide whether to pay the interest, or pay the Defense budget.

    when the US government can no longer afford the US Navy, then the rubber meets the road. that’s when the US Navy can no longer afford to hold back the Chinese navy.

    by the way, this new Chinese Space Station. of course it’s a space weapons platform. to either launch anti-satellite satellites, blinding the US military, or to launch space to surface weapons. it’s also good for zero G research into viruses, which is an actual thing – viruses grow better in zero G.

    it’s their own private space station, and won’t have any oversight, UN busybodies, or Democrat Presidents blocking Chinese activities up there.

    oh, and the Chinese will deliberately crash all their rockets too. the rockets they’re using to launch the space station parts into orbit. which is something they could avoid without much trouble, but as you can see, they plainly don’t give a fuck.

  33. @Charles Pewitt
    https://twitter.com/WSJ/status/1390924462636290050?s=20

    https://twitter.com/NorthmanTrader/status/1391002407556026369?s=20

    https://twitter.com/NorthmanTrader/status/1390644239361396740?s=20

    Replies: @Ian Smith

  34. Rob says:

    I do not know much about crypto currency. My understanding is that people ‘mine’ bitcoins by maintaining a record of all Bitcoin transactions, and that’s called the blockchain. I also think I read that the number of bitcoins that will ever exist is finite. There is a set maximum and no entity can inflate the currency. What happens when existing bitcoins reach that maximum number, what happens to the blockchain? What is the incentive to maintain a copy of the ledger when that no longer ‘mines’ bitcoins? Will the mining in effect be a tax on everyone’s bitcoins?

  35. @Daniel H
    @A123


    The circular flow Fed to Treasury and back to Fed is a net zero.
     
    This circular flow is the very heart of the matter. Can it be sustained? How long can the world's largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?

    Replies: @V. K. Ovelund, @A123

    This is the right question in my opinion:

    This circular flow is the very heart of the matter. Can it be sustained? How long can the world’s largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?

    Yes, there is a limit. It stops when foreigners, mainly Chinese, cease to accept paper IOUs (as you put it) in payment. It stops when international trade dedollarizes.

    The good news is that, in the worst case as far as I know, the result will be a 10.2-percent reduction in our material standard of living. Justification follows the break.

    MORE

    Dedollarization of international trade forces the United States to close the trade deficit, which before the pandemic ran at 2.9 percent of GDP (I gave the figure incorrectly last time: sources here, here and here.)

    Some have observed that U.S. GDP includes a lot of finance, insurance, administration and so on, which in many ways is not real, but even if you unreasonably exclude every last penny of that—and indeed, even if you exclude professional services such as accounting, architecture and engineering along with the entirety of retail trade and all information services, personal services, haircuts, groundskeeping and so on—well, you’ve just excluded 71.8 percent of GDP and even then the trade deficit only amounts to 10.2 percent of the rock-solid remainder.

    We won’t particularly like taking a temporary 10.2-percent hit to our material standard of living, but we’ll be all right.

  36. @Hapalong Cassidy
    @Achmed E. Newman

    I think Lewrockwell has a regular prepper that they post and link to. I can’t remember much else about her, except it’s a her.

    Replies: @Achmed E. Newman, @Achmed E. Newman, @Daniel H, @Hapalong Cassidy

  37. Rosie says:
    @Achmed E. Newman
    I've been away from this blog for quite a while, with only so many hours in the day. I could not pass up this financial stupidity post, though. I know this is not your bread & butter as far as this blog goes, A.E., but I agree with you completely about the financial situation we are in here.

    I agree completely on this post, but what I'd like to add here is an explanation of what kind of trouble the American economy would be in if the FED did let interest rates rise to their natural level (i.e. the asking price for money):

    1) Were people able to keep their wealth, at least getting enough return to beat inflation, which is running at closer to 4-5% than the BLS BS 1-2% numbers, the stock market would crash. The stock market has individuals' 401 (k)s and much of regular American's "wealth" other than their houses. People feel forced into the stock market due to it being the only investment giving decent returns (cause "they" are making sure it always goes up). However, it IS risky, but it's the only choice. Were CD's giving 6% back, little old ladies with a quarter million in savings could get another $1,250 monthly to supplement their SS, rather than the less than 200 dollars you'd get now. So, the money goes into these funds now.

    2) The US Feral budget would be seen as the sham it is, were the rates to go up to 6, 7% or so. It's not like this is all hidden - Peak Stupidity has just this post from the '19 pie charts from the IRS - EXTRA, EXTRA, IRS tells all! (in .pdf 1040 Instructions) now, but coming shortly* we'll have a run-down from the last 10 or 20 years or so.

    If interest rates went from the 1.6% net average interest rates (now) to 7% on the Treasury bonds that support the Fed-gov, 35% of the outlays would be for interest, instead of the 8% today. It was 6 % only a couple of years ago. Peak Stupidity just compared '19 to '15, with an excerpt after the [MORE] tag.

    Hey, it's not rocket surgery, and the numbers are (amazingly) still there for us. Anyone else here even look at the IRS 1040 instruction book, or is just me? ;-}

    .

    * That means maybe today, maybe next week.


    These numbers are only to the nearest percent, but taking them for what we see, the net interest on the Federal debt has gone up by 33%, from 6% to 8%. This interest is being paid on a larget pie too. We calculated in the first post, with only the '15 pie chart, that the (also) 6% of that '15 outlays of $3.89 Trillion = $220 Billion, being paid on ~ $17 Trillion, gave an average interest rate of a low, low 1.2 - 1.3% being paid by the feds. (Is that the average rate for Treasury Bonds being redeemed? I don't know enough to state this categorically.) OK, so that 8% of the '19 outlays of $4.49 Trillion = $360 Billion. On a '19 end-of-year deficit of ~ $22 Trillion gives an average interest rate of 1.6%. Interesting... no pun intended.

    The absolute amount of interest paid in '19, that $360 Billion is 63% higher than that $220 Billion in '15, an additional $140 Billion. Just that amount of additional interest is more than the Total US Debt amount in 1943, in the middle of WWII! Oh, but a buck isn't worth nearly as much, so why compare? That's one point of this all, pointing out that the US dollar is being made worthless. The other is that the FED is in, or has put the Treasury Department in, a real pickle. If the interest rates were let to rise to natural levels, the price of money, the whole budget collapses. Imagine rates of 7%, likely only 3 points above the REAL inflation level. That's 4 3/8 times the interest, meaning that 8% of the pie goes to 35% of outlays!
     

    Replies: @Rosie

    Were CD’s giving 6% back, little old ladies with a quarter million in savings could get another $1,250 monthly to supplement their SS, rather than the less than 200 dollars you’d get now.

    Won’t someone please think of the little old ladies with a quarter million dollars in the bank? Nevermind the young couple trying to figure out how they’re going to pay their mortgage, student loans, and daycare expenses all at the same time.

    • Troll: Achmed E. Newman
  38. @V. K. Ovelund
    @anonymous

    I am no economist but an amateur who has taken a decades-long interest and has even read a little of the professional economic literature (written by economists for an audience of economists), so you can take my answer for what it's worth.


    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    A digression is necessary to review the subtle mechanism by which new money is injected into circulation. If you already know the mechanism, then you can skip to the bottom.


    1. The printing of money. The Federal Reserve prints money. The printing is electronic these days, so the use of paper notes is incidental, but the Federal Reserve prints money nevertheless.

    2. The creation of money. Money is actually created chiefly by private banks. The new money enters circulation via issue as bank loans: when the bank lends you a dollar, a dime of that dollar is money the bank possesses because a depositor has deposited it; the other 90 cents are just made up by the bank out of thin air. The first dime is significant, though: the Federal Reserve requires the dime to restrain the bank from issuing infinite loans.

    3. The creation of nonexistent money. But how can a bank make up the 90 cents out of thin air? The answer is, they just record the 90 cents in your checking account. That's it. The bank just writes the number down and, hey presto, you have money available to spend. “Available to spend” means that, if you write a check against the money in question, and the check's recipient presents it at the bank for payment, then the bank strikes the money from your account and adds it to their account.

    4. Propriety. But can a bank do that? They still don't have the 90 cents, right? So where do the 90 cents come from? I fear that the only answer is the baseball umpire's answer, for the umpire is by empowered by rule to issue, not money, but runs to each of the visiting and home teams. He didn't bring the runs with him in his pocket to the ball park that morning, but just made the runs up during the game and, as it were, added the runs to the teams' respective accounts.

    5. Currency notes. Twenty-dollar bills and such are incidental to the bank. The bank can order a case of twenty-dollar bills, delivered via an armored car, from its local Federal Reserve branch, but that's for your convenience, not the bank's. The bank doesn't care about currency notes as such.

    6. The other creation of money. Notwithstanding the aforementioned bank mechanism, federal law also allows the Federal Reserve as such to print money on its own. However, until recently, the Federal Reserve was constrained by law to use the printed money solely to buy U.S. debt on the open market. Here is how that works: [a] you, as a private person, lend the U.S. money by buying a Treasury note (or, alternately, the Chinese government lends the U.S. money by buying such a Treasury note, etc.); [b] before the note matures, you sell the note via your stock broker on the open market; [c] maybe a private person buys your immature note, but the Federal Reserve might be the buyer, paying you using the very money the Federal Reserve has just printed.

    7. Bidding up the price. Why does the last matter? Answer: because the entry of the Federal Reserve into the market for immature bonds bids up the price of immature Treasury notes, making immature notes less attractive to private buyers than those bonds would otherwise be. The last encourages private buyers to buy new notes rather than existing ones, even if the interest rate the Treasury notes promise is low.

    8. Low rates. But if the interest rate Treasury notes promise is so low, why don't private buyers buy corporate or foreign bonds, instead? Empirically, this isn't really an issue, because some Americans for various reasons of their own prefer an undefaultable federal bond in any case, especially when those Americans can turn right around and sell the bond to the Federal Reserve on the open market any time they want; but if it were an issue then Congress would make up the shortfall via taxation or, if Congress preferred, by granting the Federal Reserve extra powers or emergency powers as during 2020. One way or another, the money is going to get printed; and one way or another, a sufficient share of the printed money is going to land in the U.S. Treasury. The mechanism described in points 1 through 7 has thus far sufficed.

    9. Running out of money. But where do the private buyers get the money to lend? Don't they eventually run out? The answer is, no, because the Federal Reserve is continuously injecting new money via the aforementioned open-market purchase of immature bonds. The Federal Reserve can inject as much new money as it takes, until the money makes its way through the channels of commerce to the lenders.

    Got that? Money is printed, then injected into the economy as loans or via the Fed's purchase of immature bonds. Admittedly, unless you already know at least half the story, it's nearly impossible to take in at one sitting, but ...

    In simple to understand terms, ...
     
    ... well, I'm doing the best I can.

    10. Maturity. When immature notes the Federal Reserve has bought finally mature, the Treasury pays the Federal Reserve the notes' principal plus the originally promised interest. But where does the Treasury get the money to pay? Answer: partly from tax revenue; partly from the issue of new notes. Because of point 8 above, the money with which to repay never runs out.

    11. Distribution of profits. Upon receipt, the Federal Reserve just destroys the principal. The interest however is split into two funds: about 30 percent (if I read the financials correctly) is paid to the private banks that formally own the Federal Reserve as dividends; the other 70 percent, after the Federal Reserve's institutional operating costs are subtracted, is simply handed over to the U.S. Treasury.

    12. Fiat. One point that frequently confuses people is why the dollar has the special status it enjoys. If the dollar, then why not Bitcoin or Ethereum? What is to stop citizens from transacting in some other currency and leaving the dollar busted? The answer however is straightforward: you cannot pay your taxes using Bitcoin or Ethereum. Even if you pay no taxes, the vendors from whom you buy pay taxes. They require dollars to pay. This is the chief reason the dollar has fiat.

    I won't try to delve deeply into the question of whether the foregoing structure is wise. The structure has been stable for a long time, though, so one is reluctant to fiddle too much with it; and it has at least the virtue that it injects money into circulation, not at any one concentrated point, but by an insensible general seepage, operating simultaneously in every city and town in the United States, so long as the town has a bank branch or, better yet, a local bank. So, yes, it's not a bad system on the whole.

    Which finally brings us to your question:

    ... what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn't really matter.

    Now, none of the foregoing is meant to excuse profligate fiscal policy. The printing of money creates no new wealth, but merely affords the Treasury cash with which to commandeer as much of the national wealth as the federal government may require, at private citizens' expense. By “wealth,” I mean goods and services. For example, if the government adds another thousand Ford sedans to its fleet this year, then that means (approximately) that a thousand citizens who would rather be driving new sedans will have to make do with their old sedans another year. It means, generally, that prices rise and/or wages fall.

    This has been a long answer, though hopefully no longer than necessary. Since the answer interests me at least, I thank you for affording me the excuse to write it! Perhaps the answer will interest someone else, as well.

    Meanwhile, I believe that I grasp the point that AE is making about the Fed's support of asset prices via zero interest rates. It is a sophisticated point and I think that you should give it careful consideration. However, I do not believe that, in and of itself, it portends the macroeconomical armageddon AE believes it does.

    Replies: @Buzz Mohawk, @anonymous, @Citizen of a Silly Country, @Daniel H

    Yours is an excellent explanation!

    However, it needs more emphasis on the inflationary effects of the system. This means not only the commandeering of wealth by government, as you say, but also the placing of too many of those 90%-instant, fractional-reserve dollars into citizens’ hands via easy lending, thus driving up prices.

    College tuitions and home prices are two good examples of how this happens.

    • Replies: @V. K. Ovelund
    @Buzz Mohawk


    However, it needs more emphasis on the inflationary effects of the system.
     
    Correction accepted. I agree, strongly, 100 percent.

    College tuitions and home prices are two good examples of how this happens.
     
    And these two examples have gutted the dreams of millions of American Millennials. The gutting is inexcusable, indefensible. Congress is to blame, and we voters who have elected Congress must take the blame in turn.

    Had we elected, say, Mark G. to Congress, we would not have these problems.

    Replies: @Rosie

  39. Dumbo says:
    @Mark G.
    I've seen the labor shortages from the government subsidizing people to not work affect my daily life. My nearest barbershop normally has four barbers and now only has two so it's harder to just walk in and get a haircut. I went to get some auto repairs done. I was told they only had one technician and he didn't show up for work that day. I made an appointment at another shop. When I tried to get a taxi home while my car was being repaired I found I couldn't get one so I decided to walk home. While walking home I fell, hit my head, and had to go to the emergency room of a hospital. I then started investigating how to use Uber or Lyft after I got home. I see, though, they are also having trouble getting drivers due to stimulus checks and unemployment benefits:

    https://www.businessinsider.com/why-uber-lyft-expensive-taking-long-driver-shortage-2021-4

    In addition to government induced labor shortages leading to less availability of goods and services, the inflation will also lead to even more of it. When inflation really takes off the voters will start calling for government price controls. Demand will then exceed supply, followed either by shortages or by rationing of goods and services. The voters who have voted for the bad economic policies up to this point aren't going to suddenly become wise and balk at price controls. They will be all for them. I'm 64 and have never seen anything like this level of economic irrationality in my life and it's a little bit frightening.

    Replies: @Dumbo, @DanHessinMD

    I’ve seen the labor shortages from the government subsidizing people to not work affect my daily life. My nearest barbershop normally has four barbers and now only has two so it’s harder to just walk in and get a haircut.

    Is it hapenning because of stimulus checks or just because Covid reduction in business and the whole economic downturn?

    It seems to me that most people would be happy to try to keep both the stimulus check, PLUS the money they can get from working, but what do I know.

    Anyway, I think that this (as everything else really) is pushed by big companies such as Amazon, etc. Perhaps they reached a point where it is more profitable to them to use robots and drones as their main workforce, and it’s more cost-effective to pay people to just stay at home (actually, the government/taxpayer pays them, not them), not as workers but merely consumers, ordering Amazon products and watching Amazon entertainment with the stimulus check (win-win for them).

    I went to get some auto repairs done. I was told they only had one technician and he didn’t show up for work that day. I made an appointment at another shop. When I tried to get a taxi home while my car was being repaired I found I couldn’t get one so I decided to walk home. While walking home I fell, hit my head, and had to go to the emergency room of a hospital.

    You seem unlucky. 😉 Or it was just a bad bay.

    • LOL: Rosie
    • Replies: @Achmed E. Newman
    @Dumbo


    It seems to me that most people would be happy to try to keep both the stimulus check, PLUS the money they can get from working, but what do I know.
     
    I don't think it's the stimulus checks alone but still some sort of larger-than-normal unemployment checks that are keeping people at home. You don't get the money, of course, if you go back to work, on the books, that is. My friend's buddies who run a semi-decent restaurant say they've had to hire guys under the table, or they wouldn't come back in.

    A hotel manager told me just the other day, as she was rushing around to take care of something, that she couldn't get enough staff back.

    I agree that Big-Biz has been (coincidentally? Nah!) coming out the best during this Kung Flu PanicFest.

    Replies: @JR Ewing

  40. @Mark G.
    I've seen the labor shortages from the government subsidizing people to not work affect my daily life. My nearest barbershop normally has four barbers and now only has two so it's harder to just walk in and get a haircut. I went to get some auto repairs done. I was told they only had one technician and he didn't show up for work that day. I made an appointment at another shop. When I tried to get a taxi home while my car was being repaired I found I couldn't get one so I decided to walk home. While walking home I fell, hit my head, and had to go to the emergency room of a hospital. I then started investigating how to use Uber or Lyft after I got home. I see, though, they are also having trouble getting drivers due to stimulus checks and unemployment benefits:

    https://www.businessinsider.com/why-uber-lyft-expensive-taking-long-driver-shortage-2021-4

    In addition to government induced labor shortages leading to less availability of goods and services, the inflation will also lead to even more of it. When inflation really takes off the voters will start calling for government price controls. Demand will then exceed supply, followed either by shortages or by rationing of goods and services. The voters who have voted for the bad economic policies up to this point aren't going to suddenly become wise and balk at price controls. They will be all for them. I'm 64 and have never seen anything like this level of economic irrationality in my life and it's a little bit frightening.

    Replies: @Dumbo, @DanHessinMD

    The left can end the irrationality on the economy in an instant just as they can on crime, by starting to tell the truth.

    Unfortunately, they have a belief system in which social falsehoods are the main tenets.

    • Agree: Mark G.
  41. I just read this book, recommended by a commenter here. A debt free Catholic family of 16, where only the dad works(1) and earns an unremarkable income. They seem to have happy, full life with their needs are met. Much recommend. Very prosper.

    Some ideas:

    * Faith is central. With a faith community and church, a lot of the best things in life are free. Also, if you are basically happy in a life of faith, your need to fill an emotional hole with stuff will be less. Even more, you will be able to go through hardship without losing your head.

    * Tithing of money and time helps one feel abundant. That may sound dorky, but if you volunteer with your church food pantry, say, you feel rich without spending any money. If you tithe 10%, you feel well off.

    * Kids should work as soon as they can. This is good for them! The grown fraction of the Fatzinger kids are homeowners in their 20s or otherwise doing solidly.

    * Frugality should be a big part of everyone’s life. These guys go to thrift stores a bunch. Rarely go to restaurants or pay for entertainment. Drive cars into the ground.

    * Homeownership is very important. Mortgage debt is the one debt these guys were willing to take on, although they paid it down in an accelerated way. All other debt they rejected utterly. Great advice. If you are in debt, you are someone else’s financial instrument.

    * For f$cks sake, don’t stop living! Don’t stop having kids or become a paranoiac. I will add that taxes in the US are very friendly toward those who have kids. Across most times in history, things have been much worse (and in most other countries now). It is always something. Folks shouldn’t be like incellers in the game of life. Life is hard but there is a lot of winning going on.

    * Financial study is an important hobby. Learn to like studying financial success and investing.

    (1) Well, the kids work for their own money as soon as they are old enough.

    • Agree: Achmed E. Newman
    • Replies: @YetAnotherAnon
    @DanHessinMD

    "For f$cks sake, don’t stop living! Don’t stop having kids or become a paranoiac."

    I think this letter in the Guardian is germane:

    https://www.theguardian.com/lifeandstyle/2020/jan/26/im-almost-50-and-full-of-regret-its-too-late-to-have-children-mariella-frostrup


    I’m a 49-year-old woman. I work hard, own a home and live a fairly good life. My problem is that I can’t help but feel regretful that I never had children. I can’t quite believe this is how my life turned out. When I was younger I ached for my own child.

    I have a partner currently. We don’t live together, he’s younger than I am and quite possibly the loveliest man I’ve been in a relationship with. It’s too late for me to conceive now and IVF isn’t an option as we don’t have the money. He says he doesn’t care, but he dotes on friends’ children and I fear that when he’s older he’ll feel regretful, too.

    In previous relationships I’ve had two abortions and two miscarriages and I’m not sure I ever recovered emotionally. I somehow got my life back on track, though I suffered another miscarriage along the way. Those losses left me feeling numb and I pretend to others who ask that I made positive choices. I feel ashamed, guilty and cowardly.

    I want to know how to get through these next few years unscathed. I’m too serious, anxious about money, the environment, everything. I suppose I am a typical spinster cat-woman. I fear the emotional wrecking ball of the menopause and want to move on and to not think about what could have been – but it’s getting worse, not better.
     
    Nice job, nice house, nice man, empty life. Many such cases!

    (and just imagine being 49 with no family, a lousy job and a rented apartment...)

    Replies: @nebulafox, @The Real World

  42. @Dumbo
    @Mark G.


    I’ve seen the labor shortages from the government subsidizing people to not work affect my daily life. My nearest barbershop normally has four barbers and now only has two so it’s harder to just walk in and get a haircut.

     

    Is it hapenning because of stimulus checks or just because Covid reduction in business and the whole economic downturn?

    It seems to me that most people would be happy to try to keep both the stimulus check, PLUS the money they can get from working, but what do I know.

    Anyway, I think that this (as everything else really) is pushed by big companies such as Amazon, etc. Perhaps they reached a point where it is more profitable to them to use robots and drones as their main workforce, and it's more cost-effective to pay people to just stay at home (actually, the government/taxpayer pays them, not them), not as workers but merely consumers, ordering Amazon products and watching Amazon entertainment with the stimulus check (win-win for them).


    I went to get some auto repairs done. I was told they only had one technician and he didn’t show up for work that day. I made an appointment at another shop. When I tried to get a taxi home while my car was being repaired I found I couldn’t get one so I decided to walk home. While walking home I fell, hit my head, and had to go to the emergency room of a hospital.
     
    You seem unlucky. ;) Or it was just a bad bay.

    Replies: @Achmed E. Newman

    It seems to me that most people would be happy to try to keep both the stimulus check, PLUS the money they can get from working, but what do I know.

    I don’t think it’s the stimulus checks alone but still some sort of larger-than-normal unemployment checks that are keeping people at home. You don’t get the money, of course, if you go back to work, on the books, that is. My friend’s buddies who run a semi-decent restaurant say they’ve had to hire guys under the table, or they wouldn’t come back in.

    A hotel manager told me just the other day, as she was rushing around to take care of something, that she couldn’t get enough staff back.

    I agree that Big-Biz has been (coincidentally? Nah!) coming out the best during this Kung Flu PanicFest.

    • Replies: @JR Ewing
    @Achmed E. Newman

    It's just an old run of the mill Econ 101 indifference curve. Everyone has a preference level where

    $Gov + LeisureHours = $Wages

    Simply put, for labor participation to rise, $Wages just needs to be high enough to overcome the other side of the equation. But right now those $Wages simply isn't close. Most people would prefer to sit at home and get less money than go get yelled at by a boss for more money.

    To solve this problem there are three possible solutions:

    1) Lower the value of $Gov

    2) Lower the value of leisure (i.e. make cable TV or video games or alcohol or whatever more expensive)

    2) Raise the value of $Wages

    Unfortunately, this gets back to the original point of this post: the first option is politically untenable and the second two are inflationary.

    No politician is going to willingly cut off the money supply because that can be directly traced back to him and is electoral suicide, ergo they will eventually be forced to let inflation explode because that's harder to explicitly pin back onto individual politicians.

    In fact, they'll just keep raising $gov in response right up to the very end like they've been doing now for 20+ years. ("Hey, I tried to fight inflation by giving you more money"... and most voters are ignorant enough to believe that)

    It's not going to get fixed, everything is going to have to break first and get much much uglier.

    But we've been saying this for years.

  43. Debt Jubilee! Debt Jubilee! Debt Jubilee!

    • Agree: Rosie
  44. The push for Central Bank Digital Currency is driven by the need to control global inflation.

    As the Chinese are experimenting, if the CBDC expires in a stated time period, then spend it or lose. Furthermore, since the CBDC expires as new CBDC are issued, the total ‘CBDC money supply’ can be managed to achieve any desired inflation rate. The social control aspects of this are absolutely stunning.

    This coupled with yield curve control are the new central bank policy tools to be unveiled to manage global inflation.

    Traditional inflation can be viewed as an accumulation of issued currency that continues to grow, M1 and M2. This is the MMT way around this.

    Of course, it will work until it doesn’t.

    • Thanks: V. K. Ovelund
  45. ~ May be time to think consequences, mining gold poison, lakes of cyanide. The only place gold belongs is in teeth, which if that’s was only use could be mined differently for small use, but as some trade has to stop, created hoarding and false focus, false life. As many in history have seen from ignoring what matters. Sharing and focus with others, was replaced by hoarding. Error.

    Clean food water, natural earth life that could continue infinity, not overpopulating, not allowing tyrants, are the basics, and none of those are on most people’s list. Now there is a mask on every face. Sharing more important than anything else. Not with everyone, but those with similar ideals, beyond same old people, small bubble. Sharing is what people should think of as value instead of gold. Sharing info knowlege, energy, food, whatever.

    That said, article makes points, second paragraph or sentence and few other parts. Eyes need to see. Thanks.

    .

  46. anonymous[291] • Disclaimer says:
    @V. K. Ovelund
    @anonymous

    I am no economist but an amateur who has taken a decades-long interest and has even read a little of the professional economic literature (written by economists for an audience of economists), so you can take my answer for what it's worth.


    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    A digression is necessary to review the subtle mechanism by which new money is injected into circulation. If you already know the mechanism, then you can skip to the bottom.


    1. The printing of money. The Federal Reserve prints money. The printing is electronic these days, so the use of paper notes is incidental, but the Federal Reserve prints money nevertheless.

    2. The creation of money. Money is actually created chiefly by private banks. The new money enters circulation via issue as bank loans: when the bank lends you a dollar, a dime of that dollar is money the bank possesses because a depositor has deposited it; the other 90 cents are just made up by the bank out of thin air. The first dime is significant, though: the Federal Reserve requires the dime to restrain the bank from issuing infinite loans.

    3. The creation of nonexistent money. But how can a bank make up the 90 cents out of thin air? The answer is, they just record the 90 cents in your checking account. That's it. The bank just writes the number down and, hey presto, you have money available to spend. “Available to spend” means that, if you write a check against the money in question, and the check's recipient presents it at the bank for payment, then the bank strikes the money from your account and adds it to their account.

    4. Propriety. But can a bank do that? They still don't have the 90 cents, right? So where do the 90 cents come from? I fear that the only answer is the baseball umpire's answer, for the umpire is by empowered by rule to issue, not money, but runs to each of the visiting and home teams. He didn't bring the runs with him in his pocket to the ball park that morning, but just made the runs up during the game and, as it were, added the runs to the teams' respective accounts.

    5. Currency notes. Twenty-dollar bills and such are incidental to the bank. The bank can order a case of twenty-dollar bills, delivered via an armored car, from its local Federal Reserve branch, but that's for your convenience, not the bank's. The bank doesn't care about currency notes as such.

    6. The other creation of money. Notwithstanding the aforementioned bank mechanism, federal law also allows the Federal Reserve as such to print money on its own. However, until recently, the Federal Reserve was constrained by law to use the printed money solely to buy U.S. debt on the open market. Here is how that works: [a] you, as a private person, lend the U.S. money by buying a Treasury note (or, alternately, the Chinese government lends the U.S. money by buying such a Treasury note, etc.); [b] before the note matures, you sell the note via your stock broker on the open market; [c] maybe a private person buys your immature note, but the Federal Reserve might be the buyer, paying you using the very money the Federal Reserve has just printed.

    7. Bidding up the price. Why does the last matter? Answer: because the entry of the Federal Reserve into the market for immature bonds bids up the price of immature Treasury notes, making immature notes less attractive to private buyers than those bonds would otherwise be. The last encourages private buyers to buy new notes rather than existing ones, even if the interest rate the Treasury notes promise is low.

    8. Low rates. But if the interest rate Treasury notes promise is so low, why don't private buyers buy corporate or foreign bonds, instead? Empirically, this isn't really an issue, because some Americans for various reasons of their own prefer an undefaultable federal bond in any case, especially when those Americans can turn right around and sell the bond to the Federal Reserve on the open market any time they want; but if it were an issue then Congress would make up the shortfall via taxation or, if Congress preferred, by granting the Federal Reserve extra powers or emergency powers as during 2020. One way or another, the money is going to get printed; and one way or another, a sufficient share of the printed money is going to land in the U.S. Treasury. The mechanism described in points 1 through 7 has thus far sufficed.

    9. Running out of money. But where do the private buyers get the money to lend? Don't they eventually run out? The answer is, no, because the Federal Reserve is continuously injecting new money via the aforementioned open-market purchase of immature bonds. The Federal Reserve can inject as much new money as it takes, until the money makes its way through the channels of commerce to the lenders.

    Got that? Money is printed, then injected into the economy as loans or via the Fed's purchase of immature bonds. Admittedly, unless you already know at least half the story, it's nearly impossible to take in at one sitting, but ...

    In simple to understand terms, ...
     
    ... well, I'm doing the best I can.

    10. Maturity. When immature notes the Federal Reserve has bought finally mature, the Treasury pays the Federal Reserve the notes' principal plus the originally promised interest. But where does the Treasury get the money to pay? Answer: partly from tax revenue; partly from the issue of new notes. Because of point 8 above, the money with which to repay never runs out.

    11. Distribution of profits. Upon receipt, the Federal Reserve just destroys the principal. The interest however is split into two funds: about 30 percent (if I read the financials correctly) is paid to the private banks that formally own the Federal Reserve as dividends; the other 70 percent, after the Federal Reserve's institutional operating costs are subtracted, is simply handed over to the U.S. Treasury.

    12. Fiat. One point that frequently confuses people is why the dollar has the special status it enjoys. If the dollar, then why not Bitcoin or Ethereum? What is to stop citizens from transacting in some other currency and leaving the dollar busted? The answer however is straightforward: you cannot pay your taxes using Bitcoin or Ethereum. Even if you pay no taxes, the vendors from whom you buy pay taxes. They require dollars to pay. This is the chief reason the dollar has fiat.

    I won't try to delve deeply into the question of whether the foregoing structure is wise. The structure has been stable for a long time, though, so one is reluctant to fiddle too much with it; and it has at least the virtue that it injects money into circulation, not at any one concentrated point, but by an insensible general seepage, operating simultaneously in every city and town in the United States, so long as the town has a bank branch or, better yet, a local bank. So, yes, it's not a bad system on the whole.

    Which finally brings us to your question:

    ... what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn't really matter.

    Now, none of the foregoing is meant to excuse profligate fiscal policy. The printing of money creates no new wealth, but merely affords the Treasury cash with which to commandeer as much of the national wealth as the federal government may require, at private citizens' expense. By “wealth,” I mean goods and services. For example, if the government adds another thousand Ford sedans to its fleet this year, then that means (approximately) that a thousand citizens who would rather be driving new sedans will have to make do with their old sedans another year. It means, generally, that prices rise and/or wages fall.

    This has been a long answer, though hopefully no longer than necessary. Since the answer interests me at least, I thank you for affording me the excuse to write it! Perhaps the answer will interest someone else, as well.

    Meanwhile, I believe that I grasp the point that AE is making about the Fed's support of asset prices via zero interest rates. It is a sophisticated point and I think that you should give it careful consideration. However, I do not believe that, in and of itself, it portends the macroeconomical armageddon AE believes it does.

    Replies: @Buzz Mohawk, @anonymous, @Citizen of a Silly Country, @Daniel H

    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn’t really matter.

    That simply sounds too good to be true. The US government can run $5 trillion or whatever deficits indefinitely without serious repercussions?

    • Replies: @V. K. Ovelund
    @anonymous


    That simply sounds too good to be true. The US government can run $5 trillion or whatever deficits indefinitely without serious repercussions?
     
    No, and Treasury Secretary Janet Yellen (who seems most competent) agrees with you, and so do I.

    However, [a] a fiat dollar has value within the United States chiefly because the person to whom you pay that dollar can use it to satisfy a tax bill; [b] there is no easy way to prevent private persons with dollars they don't need right now from just sitting on the dollars, effectively taking them out of circulation for the time being; [c] fewer dollars in circulation implies lower prices; [d] lower prices implies lower wages; [e] lower wages means wage cuts, and that demoralizes labor (logically, it shouldn't, as long as prices fall, too; but observably, it does); [f] besides point d, lower prices also cause some producers to sit on finished, warehoused stock, waiting for prices to rise; [g] the combination of demoralized labor and a warehouse already full of unsold stock prompts producers to idle assembly lines; [h] workers laid off due to idle assembly lines stop buying goods and services (unless they're getting COVID bucks!); [j] the lack of buying of goods and services causes yet more assembly lines to idle in a vicious cycle.

    The vicious cycle is, of course, a depression, which the Federal Reserve is tasked by Congress with forestalling by pumping up the money supply.

    The trick is to pump up the money supply enough to prevent prices from falling, without causing prices to rise too much; but we've got some fundamental problems in the last department, with no clean solutions, and with a Congress that is unserious about finding the solutions, anyway. That is the point at which AE's post at the head of this column picks up, so I would refer you back to that—except that you have already got there, yourself, for your comment is right. The present pumping of the money supply is becoming politically untethered from its proper aim, which (as we said) is to prevent collapse of prices.

    An expert would be better than I am at putting these ideas into plain language, incidentally. If any of it sounds airy and pompous, that's my lack of genuine expertise talking; so please pardon.

    Replies: @utu

  47. @Chrisnonymous
    @Buzz Mohawk

    Do you own physical gold or pieces of paper that say you purchased gold existing somewhere? Indians really like having physical gold. Around their necks, hanging from their ears, woven into their clothing, etc. Kind of like black rappers.

    I would like to have physical gold, but I worry about storing it safely. You have to keep in your abode or it isn't really yours. But if you keep it, your wealth is liable to be stolen or lost in a conflagration, etc. This is how banks started, I imagine, but I wouldn't trust a bank today.

    Replies: @Achmed E. Newman, @Buzz Mohawk, @Magic Dirt Resident

    If it’s not physical gold/silver then it’s not yours.

    I highly recommend getting to know a coin dealer in your area. They give much better prices than JM bullion or online stores and they have an incredible depth of knowledge. Plus they are usually based and very fun to talk to.

    • Agree: Realist
  48. @Buzz Mohawk
    @V. K. Ovelund

    Yours is an excellent explanation!

    However, it needs more emphasis on the inflationary effects of the system. This means not only the commandeering of wealth by government, as you say, but also the placing of too many of those 90%-instant, fractional-reserve dollars into citizens' hands via easy lending, thus driving up prices.

    College tuitions and home prices are two good examples of how this happens.

    Replies: @V. K. Ovelund

    However, it needs more emphasis on the inflationary effects of the system.

    Correction accepted. I agree, strongly, 100 percent.

    College tuitions and home prices are two good examples of how this happens.

    And these two examples have gutted the dreams of millions of American Millennials. The gutting is inexcusable, indefensible. Congress is to blame, and we voters who have elected Congress must take the blame in turn.

    Had we elected, say, Mark G. to Congress, we would not have these problems.

    • Replies: @Rosie
    @V. K. Ovelund


    And these two examples have gutted the dreams of millions of American Millennials. The gutting is inexcusable, indefensible. Congress is to blame, and we voters who have elected Congress must take the blame in turn.
     
    The question is what to do about it now. In what I have taken to calling the root cause fallacy, there is a tendency to suppose that the way to address a problem stemming from X is to eliminate X. This certainly has common sense appeal, but in fact, eliminating X may compound the harm. From what I understand, while opiate withdrawal is hell on Earth, almost everyone survives and has at least the hope of a better future. Benzo withdrawal, on the other hand, might kill you.

    Replies: @V. K. Ovelund

  49. @V. K. Ovelund
    @anonymous

    I am no economist but an amateur who has taken a decades-long interest and has even read a little of the professional economic literature (written by economists for an audience of economists), so you can take my answer for what it's worth.


    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    A digression is necessary to review the subtle mechanism by which new money is injected into circulation. If you already know the mechanism, then you can skip to the bottom.


    1. The printing of money. The Federal Reserve prints money. The printing is electronic these days, so the use of paper notes is incidental, but the Federal Reserve prints money nevertheless.

    2. The creation of money. Money is actually created chiefly by private banks. The new money enters circulation via issue as bank loans: when the bank lends you a dollar, a dime of that dollar is money the bank possesses because a depositor has deposited it; the other 90 cents are just made up by the bank out of thin air. The first dime is significant, though: the Federal Reserve requires the dime to restrain the bank from issuing infinite loans.

    3. The creation of nonexistent money. But how can a bank make up the 90 cents out of thin air? The answer is, they just record the 90 cents in your checking account. That's it. The bank just writes the number down and, hey presto, you have money available to spend. “Available to spend” means that, if you write a check against the money in question, and the check's recipient presents it at the bank for payment, then the bank strikes the money from your account and adds it to their account.

    4. Propriety. But can a bank do that? They still don't have the 90 cents, right? So where do the 90 cents come from? I fear that the only answer is the baseball umpire's answer, for the umpire is by empowered by rule to issue, not money, but runs to each of the visiting and home teams. He didn't bring the runs with him in his pocket to the ball park that morning, but just made the runs up during the game and, as it were, added the runs to the teams' respective accounts.

    5. Currency notes. Twenty-dollar bills and such are incidental to the bank. The bank can order a case of twenty-dollar bills, delivered via an armored car, from its local Federal Reserve branch, but that's for your convenience, not the bank's. The bank doesn't care about currency notes as such.

    6. The other creation of money. Notwithstanding the aforementioned bank mechanism, federal law also allows the Federal Reserve as such to print money on its own. However, until recently, the Federal Reserve was constrained by law to use the printed money solely to buy U.S. debt on the open market. Here is how that works: [a] you, as a private person, lend the U.S. money by buying a Treasury note (or, alternately, the Chinese government lends the U.S. money by buying such a Treasury note, etc.); [b] before the note matures, you sell the note via your stock broker on the open market; [c] maybe a private person buys your immature note, but the Federal Reserve might be the buyer, paying you using the very money the Federal Reserve has just printed.

    7. Bidding up the price. Why does the last matter? Answer: because the entry of the Federal Reserve into the market for immature bonds bids up the price of immature Treasury notes, making immature notes less attractive to private buyers than those bonds would otherwise be. The last encourages private buyers to buy new notes rather than existing ones, even if the interest rate the Treasury notes promise is low.

    8. Low rates. But if the interest rate Treasury notes promise is so low, why don't private buyers buy corporate or foreign bonds, instead? Empirically, this isn't really an issue, because some Americans for various reasons of their own prefer an undefaultable federal bond in any case, especially when those Americans can turn right around and sell the bond to the Federal Reserve on the open market any time they want; but if it were an issue then Congress would make up the shortfall via taxation or, if Congress preferred, by granting the Federal Reserve extra powers or emergency powers as during 2020. One way or another, the money is going to get printed; and one way or another, a sufficient share of the printed money is going to land in the U.S. Treasury. The mechanism described in points 1 through 7 has thus far sufficed.

    9. Running out of money. But where do the private buyers get the money to lend? Don't they eventually run out? The answer is, no, because the Federal Reserve is continuously injecting new money via the aforementioned open-market purchase of immature bonds. The Federal Reserve can inject as much new money as it takes, until the money makes its way through the channels of commerce to the lenders.

    Got that? Money is printed, then injected into the economy as loans or via the Fed's purchase of immature bonds. Admittedly, unless you already know at least half the story, it's nearly impossible to take in at one sitting, but ...

    In simple to understand terms, ...
     
    ... well, I'm doing the best I can.

    10. Maturity. When immature notes the Federal Reserve has bought finally mature, the Treasury pays the Federal Reserve the notes' principal plus the originally promised interest. But where does the Treasury get the money to pay? Answer: partly from tax revenue; partly from the issue of new notes. Because of point 8 above, the money with which to repay never runs out.

    11. Distribution of profits. Upon receipt, the Federal Reserve just destroys the principal. The interest however is split into two funds: about 30 percent (if I read the financials correctly) is paid to the private banks that formally own the Federal Reserve as dividends; the other 70 percent, after the Federal Reserve's institutional operating costs are subtracted, is simply handed over to the U.S. Treasury.

    12. Fiat. One point that frequently confuses people is why the dollar has the special status it enjoys. If the dollar, then why not Bitcoin or Ethereum? What is to stop citizens from transacting in some other currency and leaving the dollar busted? The answer however is straightforward: you cannot pay your taxes using Bitcoin or Ethereum. Even if you pay no taxes, the vendors from whom you buy pay taxes. They require dollars to pay. This is the chief reason the dollar has fiat.

    I won't try to delve deeply into the question of whether the foregoing structure is wise. The structure has been stable for a long time, though, so one is reluctant to fiddle too much with it; and it has at least the virtue that it injects money into circulation, not at any one concentrated point, but by an insensible general seepage, operating simultaneously in every city and town in the United States, so long as the town has a bank branch or, better yet, a local bank. So, yes, it's not a bad system on the whole.

    Which finally brings us to your question:

    ... what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn't really matter.

    Now, none of the foregoing is meant to excuse profligate fiscal policy. The printing of money creates no new wealth, but merely affords the Treasury cash with which to commandeer as much of the national wealth as the federal government may require, at private citizens' expense. By “wealth,” I mean goods and services. For example, if the government adds another thousand Ford sedans to its fleet this year, then that means (approximately) that a thousand citizens who would rather be driving new sedans will have to make do with their old sedans another year. It means, generally, that prices rise and/or wages fall.

    This has been a long answer, though hopefully no longer than necessary. Since the answer interests me at least, I thank you for affording me the excuse to write it! Perhaps the answer will interest someone else, as well.

    Meanwhile, I believe that I grasp the point that AE is making about the Fed's support of asset prices via zero interest rates. It is a sophisticated point and I think that you should give it careful consideration. However, I do not believe that, in and of itself, it portends the macroeconomical armageddon AE believes it does.

    Replies: @Buzz Mohawk, @anonymous, @Citizen of a Silly Country, @Daniel H

    You should read or listen to Richard Werner. His empirical investigation showed that banks don’t run strictly to the fractional reserve theory.

    In essence, when the bank gives you a loan, it doesn’t actually give you the money. It gives you a promise to pay the money – accounts payable, not money. The bank gets an asset, your promise to pay them back – accounts receivable.

    He argues – and I could be getting this wrong so read for yourself – that the banks are not constrained by their fractional reserves due to how their accounting works.

    • Replies: @V. K. Ovelund
    @Citizen of a Silly Country

    My reply wanders into the proverbial weeds. Readers are forewarned!


    [Richard Werner] argues ... that the banks are not constrained by their fractional reserves due to how their accounting works.
     
    A gap mars my understanding at this very point. You have precisely zeroed in on the gap. Bravo.

    Logically, according to my naïve account, two borrowers could borrow from separate banks, deposit in opposite banks, and thereby increase the reserves of both banks. There must exist some regulatory restraint against such a scheme but I do not know what that restraint is. One could break open Federal Reserve regulations and look it up but, since I am no banker, I have never done that.

    Incidentally, my earlier post (already too long) glossed over the detail that the Federal Reserve has temporarily suspended reserve requirements for the pandemic.

    In short, I do not know. It is a good question. Regarding Werner, his account chiefly regards European banks as far as I am aware, but I have admittedly not paid him much attention. Should I?

    Replies: @A123

  50. We print fiat currency by the trillions.

  51. Rosie says:
    @V. K. Ovelund
    @Buzz Mohawk


    However, it needs more emphasis on the inflationary effects of the system.
     
    Correction accepted. I agree, strongly, 100 percent.

    College tuitions and home prices are two good examples of how this happens.
     
    And these two examples have gutted the dreams of millions of American Millennials. The gutting is inexcusable, indefensible. Congress is to blame, and we voters who have elected Congress must take the blame in turn.

    Had we elected, say, Mark G. to Congress, we would not have these problems.

    Replies: @Rosie

    And these two examples have gutted the dreams of millions of American Millennials. The gutting is inexcusable, indefensible. Congress is to blame, and we voters who have elected Congress must take the blame in turn.

    The question is what to do about it now. In what I have taken to calling the root cause fallacy, there is a tendency to suppose that the way to address a problem stemming from X is to eliminate X. This certainly has common sense appeal, but in fact, eliminating X may compound the harm. From what I understand, while opiate withdrawal is hell on Earth, almost everyone survives and has at least the hope of a better future. Benzo withdrawal, on the other hand, might kill you.

    • Replies: @V. K. Ovelund
    @Rosie


    The question is what to do about it now.
     
    I have my own ideas, but since I lack influence on policy, the details of my ideas hardly matter. Mostly, I focus on simple concepts that have been tried in the U.S. in the past and are known to work, like tariffs and the restriction of immigration. Moreover, like you, I am unhappy about the hundreds of billions of federal dollars corruptly shoveled under cover of crisis to Panama's U.S. creditors (especially Marine Midland) in 1977, to Goldman Sachs in 2008 and to Blackrock in 2020: I want future shoveling to stop and, to set a salutary example, past shovel-beneficiaries to pay a price.

    In the case of fiat monetary policy as such, though, we're in the proverbial uncharted waters.

    What do you think should be done about it now?

    Replies: @Rosie

  52. @Rosie
    @V. K. Ovelund


    And these two examples have gutted the dreams of millions of American Millennials. The gutting is inexcusable, indefensible. Congress is to blame, and we voters who have elected Congress must take the blame in turn.
     
    The question is what to do about it now. In what I have taken to calling the root cause fallacy, there is a tendency to suppose that the way to address a problem stemming from X is to eliminate X. This certainly has common sense appeal, but in fact, eliminating X may compound the harm. From what I understand, while opiate withdrawal is hell on Earth, almost everyone survives and has at least the hope of a better future. Benzo withdrawal, on the other hand, might kill you.

    Replies: @V. K. Ovelund

    The question is what to do about it now.

    I have my own ideas, but since I lack influence on policy, the details of my ideas hardly matter. Mostly, I focus on simple concepts that have been tried in the U.S. in the past and are known to work, like tariffs and the restriction of immigration. Moreover, like you, I am unhappy about the hundreds of billions of federal dollars corruptly shoveled under cover of crisis to Panama’s U.S. creditors (especially Marine Midland) in 1977, to Goldman Sachs in 2008 and to Blackrock in 2020: I want future shoveling to stop and, to set a salutary example, past shovel-beneficiaries to pay a price.

    In the case of fiat monetary policy as such, though, we’re in the proverbial uncharted waters.

    What do you think should be done about it now?

    • Replies: @Rosie
    @V. K. Ovelund


    What do you think should be done about it now?
     
    Obviouly, I agree withyou about immigrationand tariffs. I'm not an economist, and I don't even like economics, but approaching the question philosophically, I can say that I am rather skeptical of claims that low interest rates punish savers, for a couple of reasons. First, most people who have savings, I suspect, have them because of previous inflation.

    Take Mr. Newman's hypothetical little old lady. Where did she get that quarter million dollars? I suspect she got it from selling a house for ten times the amount she paid for it when it was brand new 40 years ago. Now, she gets free infinity health care, a monthly check from Uncle Sam she can use to buy dirt-cheap foreign imports, and subsidized "senior" housing opportunities. Yet, Mr. Newman and other inflation hawks believe that she should be able to "keep her money" (principal) and spend it, too (interest), and if she cannot do this she is being "punished."

    It looks to me like a desire to pull the ladder up once you've got yours. If indeed the assumption is that more circulating dollars results in higher prices, how exactly does anyone ever save money absent some sort of windfall? Do suppliers of goods and services not simply raise prices to capture any excess consumer income? That would seem to be the logical corollary of that claim.

    Indeed, my own experience with the stimulus checks bears this out to an extent. Being a SAHM with a large family means not having a lot of discretionary income. Frankly, Mr. Rosie and I have more liquid cash than we ever have, but we literally can't spend it. Contractors don't return phone calls, furniture dealers have no inventory, and you can just forget about that new camper, stove, or whatever else it is you wanted to buy. I understand the frustration, but what was the alternative? Tent cities and soup kitchens? This particular economic crisis was avoidable, and possibly manufactured, but what about the next one?

    Again, I am way out of my depth here, and I could be completely wrong about all this. All I'm doing here is sharing my impressions and gut reactions, so hopefully I won't get a bunch of uncivil replies.
  53. A123 says:
    @Daniel H
    @A123


    The circular flow Fed to Treasury and back to Fed is a net zero.
     
    This circular flow is the very heart of the matter. Can it be sustained? How long can the world's largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?

    Replies: @V. K. Ovelund, @A123

    This circular flow is the very heart of the matter. Can it be sustained? How long can the world’s largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?

    You are mixing two very different things:

    -1- The Circular Flow between the Treasury and Fed, is a net ZERO between those two bodies.
    • The Treasury creates phantom securities that can only be bought and owned by the Fed.
    • The Fed creates phantom dollars that can only be used to buy those bespoke securities.

    Because this cycle nets to ZERO, it is psychological not monetary. There is no way Circular Dollars can exit the “TreasFed” for the purchase of real goods or services. As a non-monetary practice, there is no limit to how many zeros can be tacked on. The Circular Non-Debt and the Circular Non-Dollars are meaningless.

    -2- The real deficit is a problem that will cause USD to devalue at some point. However, once the Circular Non-Dollars are subtracted the fiscal picture is merely bad, not immediately disastrous. There is time for MAGA re-industrialization to boost the real goods economy in the U.S.

    When the USD slides — Robust domestic resource extraction, energy production, and manufacturing will keep Citizen Workers afloat. Real value addition will fund what Citizens need to buy. The currency will change, but the value proposition based on re-industrialization will be solid.

    PEACE 😇

    • Replies: @V. K. Ovelund
    @A123

    Your reply is eminently sound in my opinion. It concisely summarizes the principal relevant factors and places the factors in proper proportion.


    When the USD slides — Robust domestic resource extraction, energy production, and manufacturing will keep Citizen Workers afloat. Real value addition will fund what Citizens need to buy. The currency will change, but the value proposition based on re-industrialization will be solid.
     
    Yes. Spot on. Quantitatively, as far as I know, the measurables back you up.
  54. @A123
    @Daniel H


    This circular flow is the very heart of the matter. Can it be sustained? How long can the world’s largest economy print paper IOUs that are exchanged for real goods in the market? And the amount printed every year increases. Is there no limit?
     
    You are mixing two very different things:

    -1- The Circular Flow between the Treasury and Fed, is a net ZERO between those two bodies.
    • The Treasury creates phantom securities that can only be bought and owned by the Fed.
    • The Fed creates phantom dollars that can only be used to buy those bespoke securities.

    Because this cycle nets to ZERO, it is psychological not monetary. There is no way Circular Dollars can exit the "TreasFed" for the purchase of real goods or services. As a non-monetary practice, there is no limit to how many zeros can be tacked on. The Circular Non-Debt and the Circular Non-Dollars are meaningless.

    -2- The real deficit is a problem that will cause USD to devalue at some point. However, once the Circular Non-Dollars are subtracted the fiscal picture is merely bad, not immediately disastrous. There is time for MAGA re-industrialization to boost the real goods economy in the U.S.

    When the USD slides -- Robust domestic resource extraction, energy production, and manufacturing will keep Citizen Workers afloat. Real value addition will fund what Citizens need to buy. The currency will change, but the value proposition based on re-industrialization will be solid.

    PEACE 😇

    Replies: @V. K. Ovelund

    Your reply is eminently sound in my opinion. It concisely summarizes the principal relevant factors and places the factors in proper proportion.

    When the USD slides — Robust domestic resource extraction, energy production, and manufacturing will keep Citizen Workers afloat. Real value addition will fund what Citizens need to buy. The currency will change, but the value proposition based on re-industrialization will be solid.

    Yes. Spot on. Quantitatively, as far as I know, the measurables back you up.

    • Thanks: A123
  55. @Buzz Mohawk
    @Yellowface Anon


    What the lights go out, cryptos go poof.
     
    Yes, and so does "paper" gold, which is really electronic now and as imaginary as stocks and cryptocurrencies.

    Which would you rather have, a real girl, or an image of a girl on a screen? On second thought, don't answer that, because I realize some guys now would prefer the latter. LOL.

    Replies: @Arclight

    I have maybe $20K in platinum, gold, and silver coins – have definitely been thinking about adding to that recently.

    • Replies: @Buzz Mohawk
    @Arclight

    Good for you. I really think you can't go wrong putting your savings into precious metals (especially gold, because it is not as attached to industrial uses as some other metals. People around the world just love gold, and that is not going to change. Economies change industry, which changes the market for things like silver and platinum, but not the lust for gold, which is as old as human history.)

    Your situation reminds me of what mine was around the time of the college purchase I described, and shortly thereafter. Because I have always seen things this way, I have accumulated a lot of gold: coins, kilo bars, and pretty, little bars in between. (Your ability to trade or sell them later is important, thus the importance and premium markup for little coins.)

    Think of physical gold as a savings account. It is not an investment for growth. In my opinion, at least, it will serve you and me as a hedge against hyper-inflation.

    Gold is a savings account, and what is wrong with that?

  56. Rosie says:
    @V. K. Ovelund
    @Rosie


    The question is what to do about it now.
     
    I have my own ideas, but since I lack influence on policy, the details of my ideas hardly matter. Mostly, I focus on simple concepts that have been tried in the U.S. in the past and are known to work, like tariffs and the restriction of immigration. Moreover, like you, I am unhappy about the hundreds of billions of federal dollars corruptly shoveled under cover of crisis to Panama's U.S. creditors (especially Marine Midland) in 1977, to Goldman Sachs in 2008 and to Blackrock in 2020: I want future shoveling to stop and, to set a salutary example, past shovel-beneficiaries to pay a price.

    In the case of fiat monetary policy as such, though, we're in the proverbial uncharted waters.

    What do you think should be done about it now?

    Replies: @Rosie

    What do you think should be done about it now?

    Obviouly, I agree withyou about immigrationand tariffs. I’m not an economist, and I don’t even like economics, but approaching the question philosophically, I can say that I am rather skeptical of claims that low interest rates punish savers, for a couple of reasons. First, most people who have savings, I suspect, have them because of previous inflation.

    Take Mr. Newman’s hypothetical little old lady. Where did she get that quarter million dollars? I suspect she got it from selling a house for ten times the amount she paid for it when it was brand new 40 years ago. Now, she gets free infinity health care, a monthly check from Uncle Sam she can use to buy dirt-cheap foreign imports, and subsidized “senior” housing opportunities. Yet, Mr. Newman and other inflation hawks believe that she should be able to “keep her money” (principal) and spend it, too (interest), and if she cannot do this she is being “punished.”

    It looks to me like a desire to pull the ladder up once you’ve got yours. If indeed the assumption is that more circulating dollars results in higher prices, how exactly does anyone ever save money absent some sort of windfall? Do suppliers of goods and services not simply raise prices to capture any excess consumer income? That would seem to be the logical corollary of that claim.

    Indeed, my own experience with the stimulus checks bears this out to an extent. Being a SAHM with a large family means not having a lot of discretionary income. Frankly, Mr. Rosie and I have more liquid cash than we ever have, but we literally can’t spend it. Contractors don’t return phone calls, furniture dealers have no inventory, and you can just forget about that new camper, stove, or whatever else it is you wanted to buy. I understand the frustration, but what was the alternative? Tent cities and soup kitchens? This particular economic crisis was avoidable, and possibly manufactured, but what about the next one?

    Again, I am way out of my depth here, and I could be completely wrong about all this. All I’m doing here is sharing my impressions and gut reactions, so hopefully I won’t get a bunch of uncivil replies.

  57. Crypto currencies are infinite. Expect their value to eventually reflect that.

  58. @Citizen of a Silly Country
    @V. K. Ovelund

    You should read or listen to Richard Werner. His empirical investigation showed that banks don't run strictly to the fractional reserve theory.

    In essence, when the bank gives you a loan, it doesn't actually give you the money. It gives you a promise to pay the money - accounts payable, not money. The bank gets an asset, your promise to pay them back - accounts receivable.

    He argues - and I could be getting this wrong so read for yourself - that the banks are not constrained by their fractional reserves due to how their accounting works.

    Replies: @V. K. Ovelund

    My reply wanders into the proverbial weeds. Readers are forewarned!

    [Richard Werner] argues … that the banks are not constrained by their fractional reserves due to how their accounting works.

    A gap mars my understanding at this very point. You have precisely zeroed in on the gap. Bravo.

    Logically, according to my naïve account, two borrowers could borrow from separate banks, deposit in opposite banks, and thereby increase the reserves of both banks. There must exist some regulatory restraint against such a scheme but I do not know what that restraint is. One could break open Federal Reserve regulations and look it up but, since I am no banker, I have never done that.

    Incidentally, my earlier post (already too long) glossed over the detail that the Federal Reserve has temporarily suspended reserve requirements for the pandemic.

    In short, I do not know. It is a good question. Regarding Werner, his account chiefly regards European banks as far as I am aware, but I have admittedly not paid him much attention. Should I?

    • Replies: @A123
    @V. K. Ovelund


    Logically, according to my naïve account, two borrowers could borrow from separate banks, deposit in opposite banks, and thereby increase the reserves of both banks. There must exist some regulatory restraint against such a scheme but I do not know what that restraint is.
     
    The primary restraint is economic. Depending on Credit Quality, why would a firm borrow Euros at ~5% interest, and then deposit the Euros for an additional negative interest penalty of 0.5-1.0%? It only makes sense to borrow for a legitimate business purpose. That causes funds to flow at a slower rate driven by contract fulfillment and invoicing. This aligns with the anticipated cash flow rate baked into the the fractional reserve rules.

    If one could borrow cheaply and hold cash earning a return over interest expense, there may be a fractional reserve issue. Under normal circumstances this would involve borrowing short term while investing long term. The duration mismatch would show up in accounting and financial reporting. For government entities it would be GASB 40. I do not recall the corporate FASB ### off the top of my head.

    PEACE 😇

    Replies: @A123, @V. K. Ovelund

  59. TG says:

    Many interesting points here, but there is NO labor ‘shortage.” The very idea is ludicrous.

    If labor was really a limiting factor compared to other factors (like resources, capital, etc.), then wages should be shooting up IN REAL TERMS and workers should be able to get more stuff per hour of labor, not less! (Though of course employers and rentiers would get less profit per unit of investment).

    Supply and demand, people, supply and demand.

    The real problem is that the population continues to be forced upwards through a cheap labor immigration policy (more than canceling out relatively low native birthrates), meanwhile productive assets continue to be moved overseas, and there is simply not enough investment in developing new resources.

    More and more people, less and less means of production. It’s that simple.

    • Replies: @V. K. Ovelund
    @TG


    Many interesting points here, but there is NO labor ‘shortage.” The very idea is ludicrous.
     
    No, there isn't; and yes, it is. Quite right.

    Notwithstanding, Mark G.'s point as I understood it chiefly regarded persons able to work but unwilling because of overly generous unemployment-insurance payouts. Personally, I'm with you: I cringe every time someone uses to term labor shortage as though that were a bad thing; but substantively, Mark G.'s point stands.

  60. @DanHessinMD
    I just read this book, recommended by a commenter here. A debt free Catholic family of 16, where only the dad works(1) and earns an unremarkable income. They seem to have happy, full life with their needs are met. Much recommend. Very prosper.

    https://www.amazon.com/Catholic-Guide-Spending-Less-Living/dp/1646800478

    Some ideas:

    * Faith is central. With a faith community and church, a lot of the best things in life are free. Also, if you are basically happy in a life of faith, your need to fill an emotional hole with stuff will be less. Even more, you will be able to go through hardship without losing your head.

    * Tithing of money and time helps one feel abundant. That may sound dorky, but if you volunteer with your church food pantry, say, you feel rich without spending any money. If you tithe 10%, you feel well off.

    * Kids should work as soon as they can. This is good for them! The grown fraction of the Fatzinger kids are homeowners in their 20s or otherwise doing solidly.

    * Frugality should be a big part of everyone's life. These guys go to thrift stores a bunch. Rarely go to restaurants or pay for entertainment. Drive cars into the ground.

    * Homeownership is very important. Mortgage debt is the one debt these guys were willing to take on, although they paid it down in an accelerated way. All other debt they rejected utterly. Great advice. If you are in debt, you are someone else's financial instrument.

    * For f$cks sake, don't stop living! Don't stop having kids or become a paranoiac. I will add that taxes in the US are very friendly toward those who have kids. Across most times in history, things have been much worse (and in most other countries now). It is always something. Folks shouldn't be like incellers in the game of life. Life is hard but there is a lot of winning going on.

    * Financial study is an important hobby. Learn to like studying financial success and investing.

    (1) Well, the kids work for their own money as soon as they are old enough.

    Replies: @YetAnotherAnon

    “For f$cks sake, don’t stop living! Don’t stop having kids or become a paranoiac.”

    I think this letter in the Guardian is germane:

    https://www.theguardian.com/lifeandstyle/2020/jan/26/im-almost-50-and-full-of-regret-its-too-late-to-have-children-mariella-frostrup

    I’m a 49-year-old woman. I work hard, own a home and live a fairly good life. My problem is that I can’t help but feel regretful that I never had children. I can’t quite believe this is how my life turned out. When I was younger I ached for my own child.

    I have a partner currently. We don’t live together, he’s younger than I am and quite possibly the loveliest man I’ve been in a relationship with. It’s too late for me to conceive now and IVF isn’t an option as we don’t have the money. He says he doesn’t care, but he dotes on friends’ children and I fear that when he’s older he’ll feel regretful, too.

    In previous relationships I’ve had two abortions and two miscarriages and I’m not sure I ever recovered emotionally. I somehow got my life back on track, though I suffered another miscarriage along the way. Those losses left me feeling numb and I pretend to others who ask that I made positive choices. I feel ashamed, guilty and cowardly.

    I want to know how to get through these next few years unscathed. I’m too serious, anxious about money, the environment, everything. I suppose I am a typical spinster cat-woman. I fear the emotional wrecking ball of the menopause and want to move on and to not think about what could have been – but it’s getting worse, not better.

    Nice job, nice house, nice man, empty life. Many such cases!

    (and just imagine being 49 with no family, a lousy job and a rented apartment…)

    • Replies: @nebulafox
    @YetAnotherAnon

    Adopt?

    , @The Real World
    @YetAnotherAnon

    I've read plenty of males write similar things (and regret asking/forcing their girlfriends to get abortions. Some women have even been killed for refusing to. He doesn't want to pay child support.)

    Here's where both males/females aren't clear, imo: They each made decisions that made sense to them at the time given where their lives were. Then now, to make the incredibly simplistic statement that you wished you'd had kids is to not consider all that goes with that for it to have a successful result for all. Having a solid, dedicated, loving partner is generally critical to a satisfying family outcome. That is a huge challenge. I have two long-time married siblings who each have 2 adults kids but, no one else in the family has any illusions about their marriages. You couldn't pay me a 100K to have a marriage like either.

    People are sorta nuts to wish for things that are not now possible and to say they miss things they never actually had. There are so many meaningful endeavors and opportunities in life - some people are lacking imaginations and the courage to pursue them.

  61. A123 says:
    @V. K. Ovelund
    @Citizen of a Silly Country

    My reply wanders into the proverbial weeds. Readers are forewarned!


    [Richard Werner] argues ... that the banks are not constrained by their fractional reserves due to how their accounting works.
     
    A gap mars my understanding at this very point. You have precisely zeroed in on the gap. Bravo.

    Logically, according to my naïve account, two borrowers could borrow from separate banks, deposit in opposite banks, and thereby increase the reserves of both banks. There must exist some regulatory restraint against such a scheme but I do not know what that restraint is. One could break open Federal Reserve regulations and look it up but, since I am no banker, I have never done that.

    Incidentally, my earlier post (already too long) glossed over the detail that the Federal Reserve has temporarily suspended reserve requirements for the pandemic.

    In short, I do not know. It is a good question. Regarding Werner, his account chiefly regards European banks as far as I am aware, but I have admittedly not paid him much attention. Should I?

    Replies: @A123

    Logically, according to my naïve account, two borrowers could borrow from separate banks, deposit in opposite banks, and thereby increase the reserves of both banks. There must exist some regulatory restraint against such a scheme but I do not know what that restraint is.

    The primary restraint is economic. Depending on Credit Quality, why would a firm borrow Euros at ~5% interest, and then deposit the Euros for an additional negative interest penalty of 0.5-1.0%? It only makes sense to borrow for a legitimate business purpose. That causes funds to flow at a slower rate driven by contract fulfillment and invoicing. This aligns with the anticipated cash flow rate baked into the the fractional reserve rules.

    If one could borrow cheaply and hold cash earning a return over interest expense, there may be a fractional reserve issue. Under normal circumstances this would involve borrowing short term while investing long term. The duration mismatch would show up in accounting and financial reporting. For government entities it would be GASB 40. I do not recall the corporate FASB ### off the top of my head.

    PEACE 😇

    • Thanks: V. K. Ovelund
    • Replies: @A123
    @A123

    --Addendum--

    If you are worried about financial firms "self dealing" with their subsidiaries, that is also monitored.

    Non-financial affiliates (e.g. software, FinTech) receive highly intrusive monitoring under REG 23A/23B. The intent is to prevent problems from being transferred into FDIC covered entities. Incidentally, it also shines a krieg light on any "non-market" dealings that could be used to exploit the Fractional Reserve mechanism.

    Financial affiliates undergo accounting consolidation for regulatory review. Balance sheet inflating deals between affiliates will create "red flags" during consolidation.

    PEACE 😇

    Replies: @V. K. Ovelund

    , @V. K. Ovelund
    @A123

    (I am about to ask a technical question which interests A123 and me but will probably not interest most readers. )


    The primary restraint is economic. Depending on Credit Quality, why would a firm borrow Euros at ~5% interest, and then deposit the Euros for an additional negative interest penalty of 0.5-1.0%? It only makes sense to borrow for a legitimate business purpose. That causes funds to flow at a slower rate driven by contract fulfillment and invoicing. This aligns with the anticipated cash flow rate baked into the the fractional reserve rules.
     
    I know practically nothing about banking outside the United States and admittedly was not thinking of that; but within the United States, I have been pondering your interesting explanation and cannot quite assimilate it.

    My earlier sketch was oversimplified because I wanted it to be short and readable, but I believe that you have grasped the idea behind it. What I really had in mind (here is the unreadable part) was borrower B1, who borrows from bank X and then buys from vendor V1, who deposits the cash received in bank Y, boosting bank Y's reserves; whereupon borrower B2 initiates the reverse flow, borrowing from bank Y, buying from vendor V2 who deposits in bank X, completing the cycle.

    Sorry about the algebraic notation. I just don't know how to clarify the question otherwise.

    Anyway, does the cycle described not leave bank X and bank Y simultaneously with increased reserves, each increase indirectly derived, without self-dealing, from fraction-reserve-leveraged money borrowed from the other bank? In STEM terms, this would constitute the basis of an unstable positive-feedback loop.

    If you really want to get theoretical, does the situation described not quantitatively imply a state-transition matrix with an eigenvalue that lies outside the left half of the complex plane (frequency domain) or outside the complex unit circle (time domain)?

    If the last paragraph conveys nothing to a financier like you, then please disregard the last paragraph! I do not know what quantitative tools financiers use and am not deliberately trying to challenge vanity or to look smart, but am clumsily trying to express the problem, quantitatively, in terms of tools that happen to be familiar to me: Laplace transforms, state matrices and such.

    If I understood the problem better, then I could express it clearly without unreadable symbols like V2 and incomprehensible terms like eigenvalue, but I don't, so I can't. I certainly merit no extra respect for resorting to unreadables and incomprehensibles, but meanwhile was hoping that you could help. And if you could (unlike me) help readably and comprehensibly, that would be even better.

    Anyway, however one expresses it, I believe that the cycle I have described must somehow not pose a real problem, for it it did, then the fiat system would have spiraled out of control soon after the dollar's last link to gold was severed in 1971. I just do not quite understand why it does not pose a real problem.


    The primary restraint is economic.
     
    Is this why? If so, I believe it, but cannot quite see it. I cannot complete the link.

    Does the interest-rate differential between loans and desposits somehow damp the unstable eigenvalue? But banks compete by making that differential as small as they can, so such damping would seem fundamentally insufficient in theory.

    Is it bad loans that damp it? This does not quite seem to add up, either.

    A concept is missing. What is it, please?

    Replies: @V. K. Ovelund

  62. @YetAnotherAnon
    @DanHessinMD

    "For f$cks sake, don’t stop living! Don’t stop having kids or become a paranoiac."

    I think this letter in the Guardian is germane:

    https://www.theguardian.com/lifeandstyle/2020/jan/26/im-almost-50-and-full-of-regret-its-too-late-to-have-children-mariella-frostrup


    I’m a 49-year-old woman. I work hard, own a home and live a fairly good life. My problem is that I can’t help but feel regretful that I never had children. I can’t quite believe this is how my life turned out. When I was younger I ached for my own child.

    I have a partner currently. We don’t live together, he’s younger than I am and quite possibly the loveliest man I’ve been in a relationship with. It’s too late for me to conceive now and IVF isn’t an option as we don’t have the money. He says he doesn’t care, but he dotes on friends’ children and I fear that when he’s older he’ll feel regretful, too.

    In previous relationships I’ve had two abortions and two miscarriages and I’m not sure I ever recovered emotionally. I somehow got my life back on track, though I suffered another miscarriage along the way. Those losses left me feeling numb and I pretend to others who ask that I made positive choices. I feel ashamed, guilty and cowardly.

    I want to know how to get through these next few years unscathed. I’m too serious, anxious about money, the environment, everything. I suppose I am a typical spinster cat-woman. I fear the emotional wrecking ball of the menopause and want to move on and to not think about what could have been – but it’s getting worse, not better.
     
    Nice job, nice house, nice man, empty life. Many such cases!

    (and just imagine being 49 with no family, a lousy job and a rented apartment...)

    Replies: @nebulafox, @The Real World

    Adopt?

  63. @YetAnotherAnon
    @DanHessinMD

    "For f$cks sake, don’t stop living! Don’t stop having kids or become a paranoiac."

    I think this letter in the Guardian is germane:

    https://www.theguardian.com/lifeandstyle/2020/jan/26/im-almost-50-and-full-of-regret-its-too-late-to-have-children-mariella-frostrup


    I’m a 49-year-old woman. I work hard, own a home and live a fairly good life. My problem is that I can’t help but feel regretful that I never had children. I can’t quite believe this is how my life turned out. When I was younger I ached for my own child.

    I have a partner currently. We don’t live together, he’s younger than I am and quite possibly the loveliest man I’ve been in a relationship with. It’s too late for me to conceive now and IVF isn’t an option as we don’t have the money. He says he doesn’t care, but he dotes on friends’ children and I fear that when he’s older he’ll feel regretful, too.

    In previous relationships I’ve had two abortions and two miscarriages and I’m not sure I ever recovered emotionally. I somehow got my life back on track, though I suffered another miscarriage along the way. Those losses left me feeling numb and I pretend to others who ask that I made positive choices. I feel ashamed, guilty and cowardly.

    I want to know how to get through these next few years unscathed. I’m too serious, anxious about money, the environment, everything. I suppose I am a typical spinster cat-woman. I fear the emotional wrecking ball of the menopause and want to move on and to not think about what could have been – but it’s getting worse, not better.
     
    Nice job, nice house, nice man, empty life. Many such cases!

    (and just imagine being 49 with no family, a lousy job and a rented apartment...)

    Replies: @nebulafox, @The Real World

    I’ve read plenty of males write similar things (and regret asking/forcing their girlfriends to get abortions. Some women have even been killed for refusing to. He doesn’t want to pay child support.)

    Here’s where both males/females aren’t clear, imo: They each made decisions that made sense to them at the time given where their lives were. Then now, to make the incredibly simplistic statement that you wished you’d had kids is to not consider all that goes with that for it to have a successful result for all. Having a solid, dedicated, loving partner is generally critical to a satisfying family outcome. That is a huge challenge. I have two long-time married siblings who each have 2 adults kids but, no one else in the family has any illusions about their marriages. You couldn’t pay me a 100K to have a marriage like either.

    People are sorta nuts to wish for things that are not now possible and to say they miss things they never actually had. There are so many meaningful endeavors and opportunities in life – some people are lacking imaginations and the courage to pursue them.

  64. A123 says:
    @A123
    @V. K. Ovelund


    Logically, according to my naïve account, two borrowers could borrow from separate banks, deposit in opposite banks, and thereby increase the reserves of both banks. There must exist some regulatory restraint against such a scheme but I do not know what that restraint is.
     
    The primary restraint is economic. Depending on Credit Quality, why would a firm borrow Euros at ~5% interest, and then deposit the Euros for an additional negative interest penalty of 0.5-1.0%? It only makes sense to borrow for a legitimate business purpose. That causes funds to flow at a slower rate driven by contract fulfillment and invoicing. This aligns with the anticipated cash flow rate baked into the the fractional reserve rules.

    If one could borrow cheaply and hold cash earning a return over interest expense, there may be a fractional reserve issue. Under normal circumstances this would involve borrowing short term while investing long term. The duration mismatch would show up in accounting and financial reporting. For government entities it would be GASB 40. I do not recall the corporate FASB ### off the top of my head.

    PEACE 😇

    Replies: @A123, @V. K. Ovelund

    –Addendum–

    If you are worried about financial firms “self dealing” with their subsidiaries, that is also monitored.

    Non-financial affiliates (e.g. software, FinTech) receive highly intrusive monitoring under REG 23A/23B. The intent is to prevent problems from being transferred into FDIC covered entities. Incidentally, it also shines a krieg light on any “non-market” dealings that could be used to exploit the Fractional Reserve mechanism.

    Financial affiliates undergo accounting consolidation for regulatory review. Balance sheet inflating deals between affiliates will create “red flags” during consolidation.

    PEACE 😇

    • Replies: @V. K. Ovelund
    @A123


    If you are worried about financial firms “self dealing” with their subsidiaries, that is also monitored.
     
    Makes sense. I'm glad that you're here to read the regs for me, for I didn't really want to.

    So the Federal Reserve's self-dealing rules resemble the Internal Revenue Code's self-dealing rules, I gather. That actually makes a lot of sense.

    There's a series of checkboxes on federal form 1120-S that I always breeze through every year, because my case is simple (one entity; one state; no foreign ownership; etc.), but I can see how the boxes might be used to trigger reports to control self-dealing in more complex cases.

  65. @anonymous
    @V. K. Ovelund


    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn’t really matter.
     
    That simply sounds too good to be true. The US government can run $5 trillion or whatever deficits indefinitely without serious repercussions?

    Replies: @V. K. Ovelund

    That simply sounds too good to be true. The US government can run $5 trillion or whatever deficits indefinitely without serious repercussions?

    No, and Treasury Secretary Janet Yellen (who seems most competent) agrees with you, and so do I.

    [MORE]

    However, [a] a fiat dollar has value within the United States chiefly because the person to whom you pay that dollar can use it to satisfy a tax bill; [b] there is no easy way to prevent private persons with dollars they don’t need right now from just sitting on the dollars, effectively taking them out of circulation for the time being; [c] fewer dollars in circulation implies lower prices; [d] lower prices implies lower wages; [e] lower wages means wage cuts, and that demoralizes labor (logically, it shouldn’t, as long as prices fall, too; but observably, it does); [f] besides point d, lower prices also cause some producers to sit on finished, warehoused stock, waiting for prices to rise; [g] the combination of demoralized labor and a warehouse already full of unsold stock prompts producers to idle assembly lines; [h] workers laid off due to idle assembly lines stop buying goods and services (unless they’re getting COVID bucks!); [j] the lack of buying of goods and services causes yet more assembly lines to idle in a vicious cycle.

    The vicious cycle is, of course, a depression, which the Federal Reserve is tasked by Congress with forestalling by pumping up the money supply.

    The trick is to pump up the money supply enough to prevent prices from falling, without causing prices to rise too much; but we’ve got some fundamental problems in the last department, with no clean solutions, and with a Congress that is unserious about finding the solutions, anyway. That is the point at which AE’s post at the head of this column picks up, so I would refer you back to that—except that you have already got there, yourself, for your comment is right. The present pumping of the money supply is becoming politically untethered from its proper aim, which (as we said) is to prevent collapse of prices.

    An expert would be better than I am at putting these ideas into plain language, incidentally. If any of it sounds airy and pompous, that’s my lack of genuine expertise talking; so please pardon.

    • Replies: @utu
    @V. K. Ovelund

    "which the Federal Reserve is tasked by Congress with forestalling by pumping up the money supply" - By what mechanism? Interest rate?

    Replies: @V. K. Ovelund

  66. @Arclight
    @Buzz Mohawk

    I have maybe $20K in platinum, gold, and silver coins - have definitely been thinking about adding to that recently.

    Replies: @Buzz Mohawk

    Good for you. I really think you can’t go wrong putting your savings into precious metals (especially gold, because it is not as attached to industrial uses as some other metals. People around the world just love gold, and that is not going to change. Economies change industry, which changes the market for things like silver and platinum, but not the lust for gold, which is as old as human history.)

    Your situation reminds me of what mine was around the time of the college purchase I described, and shortly thereafter. Because I have always seen things this way, I have accumulated a lot of gold: coins, kilo bars, and pretty, little bars in between. (Your ability to trade or sell them later is important, thus the importance and premium markup for little coins.)

    Think of physical gold as a savings account. It is not an investment for growth. In my opinion, at least, it will serve you and me as a hedge against hyper-inflation.

    Gold is a savings account, and what is wrong with that?

  67. @A123
    @A123

    --Addendum--

    If you are worried about financial firms "self dealing" with their subsidiaries, that is also monitored.

    Non-financial affiliates (e.g. software, FinTech) receive highly intrusive monitoring under REG 23A/23B. The intent is to prevent problems from being transferred into FDIC covered entities. Incidentally, it also shines a krieg light on any "non-market" dealings that could be used to exploit the Fractional Reserve mechanism.

    Financial affiliates undergo accounting consolidation for regulatory review. Balance sheet inflating deals between affiliates will create "red flags" during consolidation.

    PEACE 😇

    Replies: @V. K. Ovelund

    If you are worried about financial firms “self dealing” with their subsidiaries, that is also monitored.

    Makes sense. I’m glad that you’re here to read the regs for me, for I didn’t really want to.

    So the Federal Reserve’s self-dealing rules resemble the Internal Revenue Code’s self-dealing rules, I gather. That actually makes a lot of sense.

    There’s a series of checkboxes on federal form 1120-S that I always breeze through every year, because my case is simple (one entity; one state; no foreign ownership; etc.), but I can see how the boxes might be used to trigger reports to control self-dealing in more complex cases.

  68. @TG
    Many interesting points here, but there is NO labor 'shortage." The very idea is ludicrous.

    If labor was really a limiting factor compared to other factors (like resources, capital, etc.), then wages should be shooting up IN REAL TERMS and workers should be able to get more stuff per hour of labor, not less! (Though of course employers and rentiers would get less profit per unit of investment).

    Supply and demand, people, supply and demand.

    The real problem is that the population continues to be forced upwards through a cheap labor immigration policy (more than canceling out relatively low native birthrates), meanwhile productive assets continue to be moved overseas, and there is simply not enough investment in developing new resources.

    More and more people, less and less means of production. It's that simple.

    Replies: @V. K. Ovelund

    Many interesting points here, but there is NO labor ‘shortage.” The very idea is ludicrous.

    No, there isn’t; and yes, it is. Quite right.

    Notwithstanding, Mark G.’s point as I understood it chiefly regarded persons able to work but unwilling because of overly generous unemployment-insurance payouts. Personally, I’m with you: I cringe every time someone uses to term labor shortage as though that were a bad thing; but substantively, Mark G.’s point stands.

  69. @A123
    @V. K. Ovelund


    Logically, according to my naïve account, two borrowers could borrow from separate banks, deposit in opposite banks, and thereby increase the reserves of both banks. There must exist some regulatory restraint against such a scheme but I do not know what that restraint is.
     
    The primary restraint is economic. Depending on Credit Quality, why would a firm borrow Euros at ~5% interest, and then deposit the Euros for an additional negative interest penalty of 0.5-1.0%? It only makes sense to borrow for a legitimate business purpose. That causes funds to flow at a slower rate driven by contract fulfillment and invoicing. This aligns with the anticipated cash flow rate baked into the the fractional reserve rules.

    If one could borrow cheaply and hold cash earning a return over interest expense, there may be a fractional reserve issue. Under normal circumstances this would involve borrowing short term while investing long term. The duration mismatch would show up in accounting and financial reporting. For government entities it would be GASB 40. I do not recall the corporate FASB ### off the top of my head.

    PEACE 😇

    Replies: @A123, @V. K. Ovelund

    (I am about to ask a technical question which interests A123 and me but will probably not interest most readers. )

    The primary restraint is economic. Depending on Credit Quality, why would a firm borrow Euros at ~5% interest, and then deposit the Euros for an additional negative interest penalty of 0.5-1.0%? It only makes sense to borrow for a legitimate business purpose. That causes funds to flow at a slower rate driven by contract fulfillment and invoicing. This aligns with the anticipated cash flow rate baked into the the fractional reserve rules.

    I know practically nothing about banking outside the United States and admittedly was not thinking of that; but within the United States, I have been pondering your interesting explanation and cannot quite assimilate it.

    [MORE]

    My earlier sketch was oversimplified because I wanted it to be short and readable, but I believe that you have grasped the idea behind it. What I really had in mind (here is the unreadable part) was borrower B1, who borrows from bank X and then buys from vendor V1, who deposits the cash received in bank Y, boosting bank Y’s reserves; whereupon borrower B2 initiates the reverse flow, borrowing from bank Y, buying from vendor V2 who deposits in bank X, completing the cycle.

    Sorry about the algebraic notation. I just don’t know how to clarify the question otherwise.

    Anyway, does the cycle described not leave bank X and bank Y simultaneously with increased reserves, each increase indirectly derived, without self-dealing, from fraction-reserve-leveraged money borrowed from the other bank? In STEM terms, this would constitute the basis of an unstable positive-feedback loop.

    If you really want to get theoretical, does the situation described not quantitatively imply a state-transition matrix with an eigenvalue that lies outside the left half of the complex plane (frequency domain) or outside the complex unit circle (time domain)?

    If the last paragraph conveys nothing to a financier like you, then please disregard the last paragraph! I do not know what quantitative tools financiers use and am not deliberately trying to challenge vanity or to look smart, but am clumsily trying to express the problem, quantitatively, in terms of tools that happen to be familiar to me: Laplace transforms, state matrices and such.

    If I understood the problem better, then I could express it clearly without unreadable symbols like V2 and incomprehensible terms like eigenvalue, but I don’t, so I can’t. I certainly merit no extra respect for resorting to unreadables and incomprehensibles, but meanwhile was hoping that you could help. And if you could (unlike me) help readably and comprehensibly, that would be even better.

    Anyway, however one expresses it, I believe that the cycle I have described must somehow not pose a real problem, for it it did, then the fiat system would have spiraled out of control soon after the dollar’s last link to gold was severed in 1971. I just do not quite understand why it does not pose a real problem.

    The primary restraint is economic.

    Is this why? If so, I believe it, but cannot quite see it. I cannot complete the link.

    Does the interest-rate differential between loans and desposits somehow damp the unstable eigenvalue? But banks compete by making that differential as small as they can, so such damping would seem fundamentally insufficient in theory.

    Is it bad loans that damp it? This does not quite seem to add up, either.

    A concept is missing. What is it, please?

    • Replies: @V. K. Ovelund
    @V. K. Ovelund

    @A123

    And, even if there is no unstable eigenvalue, it seems a heck of a temperamental way to try control a system, like driving a car with 20 bolts halfway loosened.

    I think that what I am telling you is that my concept is screwed up. If you open a few windows in an aircraft, that doesn't destabilize the system; it just adds some drag because, although the drag itself is significant, the feedback from the windows to the propulsion system is inconsequential. However, the scenario you and I are talking about sounds to me, naïvely, like feeding the exhaust from one jet engine into the intake of the other jet engine.

    I hope that, somewhere in all of that, I have asked a question that makes sense.

    Replies: @A123

  70. @V. K. Ovelund
    @A123

    (I am about to ask a technical question which interests A123 and me but will probably not interest most readers. )


    The primary restraint is economic. Depending on Credit Quality, why would a firm borrow Euros at ~5% interest, and then deposit the Euros for an additional negative interest penalty of 0.5-1.0%? It only makes sense to borrow for a legitimate business purpose. That causes funds to flow at a slower rate driven by contract fulfillment and invoicing. This aligns with the anticipated cash flow rate baked into the the fractional reserve rules.
     
    I know practically nothing about banking outside the United States and admittedly was not thinking of that; but within the United States, I have been pondering your interesting explanation and cannot quite assimilate it.

    My earlier sketch was oversimplified because I wanted it to be short and readable, but I believe that you have grasped the idea behind it. What I really had in mind (here is the unreadable part) was borrower B1, who borrows from bank X and then buys from vendor V1, who deposits the cash received in bank Y, boosting bank Y's reserves; whereupon borrower B2 initiates the reverse flow, borrowing from bank Y, buying from vendor V2 who deposits in bank X, completing the cycle.

    Sorry about the algebraic notation. I just don't know how to clarify the question otherwise.

    Anyway, does the cycle described not leave bank X and bank Y simultaneously with increased reserves, each increase indirectly derived, without self-dealing, from fraction-reserve-leveraged money borrowed from the other bank? In STEM terms, this would constitute the basis of an unstable positive-feedback loop.

    If you really want to get theoretical, does the situation described not quantitatively imply a state-transition matrix with an eigenvalue that lies outside the left half of the complex plane (frequency domain) or outside the complex unit circle (time domain)?

    If the last paragraph conveys nothing to a financier like you, then please disregard the last paragraph! I do not know what quantitative tools financiers use and am not deliberately trying to challenge vanity or to look smart, but am clumsily trying to express the problem, quantitatively, in terms of tools that happen to be familiar to me: Laplace transforms, state matrices and such.

    If I understood the problem better, then I could express it clearly without unreadable symbols like V2 and incomprehensible terms like eigenvalue, but I don't, so I can't. I certainly merit no extra respect for resorting to unreadables and incomprehensibles, but meanwhile was hoping that you could help. And if you could (unlike me) help readably and comprehensibly, that would be even better.

    Anyway, however one expresses it, I believe that the cycle I have described must somehow not pose a real problem, for it it did, then the fiat system would have spiraled out of control soon after the dollar's last link to gold was severed in 1971. I just do not quite understand why it does not pose a real problem.


    The primary restraint is economic.
     
    Is this why? If so, I believe it, but cannot quite see it. I cannot complete the link.

    Does the interest-rate differential between loans and desposits somehow damp the unstable eigenvalue? But banks compete by making that differential as small as they can, so such damping would seem fundamentally insufficient in theory.

    Is it bad loans that damp it? This does not quite seem to add up, either.

    A concept is missing. What is it, please?

    Replies: @V. K. Ovelund

    And, even if there is no unstable eigenvalue, it seems a heck of a temperamental way to try control a system, like driving a car with 20 bolts halfway loosened.

    I think that what I am telling you is that my concept is screwed up. If you open a few windows in an aircraft, that doesn’t destabilize the system; it just adds some drag because, although the drag itself is significant, the feedback from the windows to the propulsion system is inconsequential. However, the scenario you and I are talking about sounds to me, naïvely, like feeding the exhaust from one jet engine into the intake of the other jet engine.

    I hope that, somewhere in all of that, I have asked a question that makes sense.

    • Replies: @A123
    @V. K. Ovelund

    Actually my undergrad degree is Engineering, so the concepts you mention do make sense to me. However, has been far too long since I have used Linear Algebra to calculate a solution based on Eigen values.... Hopefully, I can tackle this in a somewhat simplified manner.

    One of the critical factors you mention is the time domain. Consider a firm obtaining a loan, ordering a product, and paying on delivery:

    • If that cycle takes 90 days, that money only goes through 4 fractional reserve cycles per year.
    • 45 days would result in 8 fractional reserve cycles per year.
    • 30 days would result in 12 fractional reserve cycles per year.

    There is an assumed money velocity between 30 & 90 days per transaction built into the standard concept for fractional reserve. This keeps the system away from the pure mathematical boundary.
    _____

    The "fractional" concept imposes the mathematical stability you are looking for. For clarity, call the fractions 90% recycled + 10% reserved.

    • At four cycles per year it is (100+90+81+72.9) = 343.9%
    • At eight cycles, the next four events are (65.6+59.0+53.1+47.8) = 225.5%

    Even if a firm could run events rapidly, risk free, and cost free -- the math has a boundary. Each transaction generates less recycling to "new" dollars and adds to on balance sheet reserves.

    PEACE 😇

    Replies: @V. K. Ovelund

  71. JL says:

    All of these things point to substantial price inflation on the horizon. Unlike the financial crisis of 2007-2008, the Fed has no tools in its toolkit to respond to this. On the eve of that crisis, regular people were earning a 5% return on commercial money market accounts. Plunging the return from 5.0% to 0.5% provided a lot of cushion for the financial crash.

    This doesn’t make sense, why would the Fed be looking to decrease rates in the event of substantial price inflation?

    • Replies: @V. K. Ovelund
    @JL


    This doesn’t make sense, why would the Fed be looking to decrease rates in the event of substantial price inflation?
     
    Because there was no substantial price inflation at the time. (Back in 2008, like many Americans, I mistakenly thought that there was or soon would be substantial price inflation, so I got the policy wrong; but after seeing that I had gotten it wrong, I started reading, and eventually learned a little of how it actually works.)

    The test is, now that inflation is starting to pick up (according to the treasury secretary, not me), will rates be raised? I'm with AE. I don't think that rates will be raised—not enough, anyway. Trouble will result.

    On the other hand, there probably isn't any other reasonable way to service the national debt but by keeping rates lower than one would like, so we'll see what happens.

    Replies: @JL

  72. @prime noticer
    uh, when was the last time money markets returned 5%? the mid 90s? money markets have been at like 1% for decades. this is below inflation. i last made 4% in 98 or 99.

    agree that the federal funds rate will NEVER got back up to even like 5%, let alone historical averages. it probably can't go above 3% at most.

    it's printing money from here on out, until something breaks. America is on it's way to being over. the thing is, there is still an ASTRONOMICAL amount of demand for US dollars not even being met at 8 trillion, so that soaks up some of the damage from ludicrous overprinting. they could print another 8 trillion more and a billion third worlders would love to snatch up, have and use those US dollars. the serious problems start when US dollars are not redeemable for stuff. the inflation is less of a country breaking problem at this point.

    doubt any of the money going into crypto is money that would have went into gold instead. crypto is a young person's game. old balls boomers who buy gold and silver don't even understand how to buy crypto, let alone understand how it works. they're baffled by it. crypto is making young people into millionaires, not boomers.

    Replies: @Catdog

    doubt any of the money going into crypto is money that would have went into gold instead. crypto is a young person’s game. old balls boomers who buy gold and silver don’t even understand how to buy crypto, let alone understand how it works. they’re baffled by it. crypto is making young people into millionaires, not boomers.

    Hard disagree. There is a big crossover. I am young and put my crypto profits into PM. All the guys who hang out at the PM store are into crypto. My dad is a classic retarded boomer and he’s the one who got me into crypto. And the 4chins PM threads are always full of people who own both PM and crypto.

  73. @JL

    All of these things point to substantial price inflation on the horizon. Unlike the financial crisis of 2007-2008, the Fed has no tools in its toolkit to respond to this. On the eve of that crisis, regular people were earning a 5% return on commercial money market accounts. Plunging the return from 5.0% to 0.5% provided a lot of cushion for the financial crash.
     
    This doesn't make sense, why would the Fed be looking to decrease rates in the event of substantial price inflation?

    Replies: @V. K. Ovelund

    This doesn’t make sense, why would the Fed be looking to decrease rates in the event of substantial price inflation?

    Because there was no substantial price inflation at the time. (Back in 2008, like many Americans, I mistakenly thought that there was or soon would be substantial price inflation, so I got the policy wrong; but after seeing that I had gotten it wrong, I started reading, and eventually learned a little of how it actually works.)

    The test is, now that inflation is starting to pick up (according to the treasury secretary, not me), will rates be raised? I’m with AE. I don’t think that rates will be raised—not enough, anyway. Trouble will result.

    On the other hand, there probably isn’t any other reasonable way to service the national debt but by keeping rates lower than one would like, so we’ll see what happens.

    • Replies: @JL
    @V. K. Ovelund

    Now neither of you are making sense. This is what AE wrote:


    the Fed has no tools in its toolkit to respond to this
     
    That's much different than saying the Fed has tools but won't use them, which is what you wrote.

    I mistakenly thought that there was or soon would be substantial price inflation
     
    But you're right now? What's different this time?

    Replies: @V. K. Ovelund

  74. A123 says:
    @V. K. Ovelund
    @V. K. Ovelund

    @A123

    And, even if there is no unstable eigenvalue, it seems a heck of a temperamental way to try control a system, like driving a car with 20 bolts halfway loosened.

    I think that what I am telling you is that my concept is screwed up. If you open a few windows in an aircraft, that doesn't destabilize the system; it just adds some drag because, although the drag itself is significant, the feedback from the windows to the propulsion system is inconsequential. However, the scenario you and I are talking about sounds to me, naïvely, like feeding the exhaust from one jet engine into the intake of the other jet engine.

    I hope that, somewhere in all of that, I have asked a question that makes sense.

    Replies: @A123

    Actually my undergrad degree is Engineering, so the concepts you mention do make sense to me. However, has been far too long since I have used Linear Algebra to calculate a solution based on Eigen values…. Hopefully, I can tackle this in a somewhat simplified manner.

    [MORE]

    One of the critical factors you mention is the time domain. Consider a firm obtaining a loan, ordering a product, and paying on delivery:

    • If that cycle takes 90 days, that money only goes through 4 fractional reserve cycles per year.
    • 45 days would result in 8 fractional reserve cycles per year.
    • 30 days would result in 12 fractional reserve cycles per year.

    There is an assumed money velocity between 30 & 90 days per transaction built into the standard concept for fractional reserve. This keeps the system away from the pure mathematical boundary.
    _____

    The “fractional” concept imposes the mathematical stability you are looking for. For clarity, call the fractions 90% recycled + 10% reserved.

    • At four cycles per year it is (100+90+81+72.9) = 343.9%
    • At eight cycles, the next four events are (65.6+59.0+53.1+47.8) = 225.5%

    Even if a firm could run events rapidly, risk free, and cost free — the math has a boundary. Each transaction generates less recycling to “new” dollars and adds to on balance sheet reserves.

    PEACE 😇

    • Replies: @V. K. Ovelund
    @A123

    Okay, let me think about what you have written, thanks. It will probably take me a few days to digest this.

  75. @A123
    @V. K. Ovelund

    Actually my undergrad degree is Engineering, so the concepts you mention do make sense to me. However, has been far too long since I have used Linear Algebra to calculate a solution based on Eigen values.... Hopefully, I can tackle this in a somewhat simplified manner.

    One of the critical factors you mention is the time domain. Consider a firm obtaining a loan, ordering a product, and paying on delivery:

    • If that cycle takes 90 days, that money only goes through 4 fractional reserve cycles per year.
    • 45 days would result in 8 fractional reserve cycles per year.
    • 30 days would result in 12 fractional reserve cycles per year.

    There is an assumed money velocity between 30 & 90 days per transaction built into the standard concept for fractional reserve. This keeps the system away from the pure mathematical boundary.
    _____

    The "fractional" concept imposes the mathematical stability you are looking for. For clarity, call the fractions 90% recycled + 10% reserved.

    • At four cycles per year it is (100+90+81+72.9) = 343.9%
    • At eight cycles, the next four events are (65.6+59.0+53.1+47.8) = 225.5%

    Even if a firm could run events rapidly, risk free, and cost free -- the math has a boundary. Each transaction generates less recycling to "new" dollars and adds to on balance sheet reserves.

    PEACE 😇

    Replies: @V. K. Ovelund

    Okay, let me think about what you have written, thanks. It will probably take me a few days to digest this.

  76. @V. K. Ovelund
    @anonymous

    I am no economist but an amateur who has taken a decades-long interest and has even read a little of the professional economic literature (written by economists for an audience of economists), so you can take my answer for what it's worth.


    In simple to understand terms, what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    A digression is necessary to review the subtle mechanism by which new money is injected into circulation. If you already know the mechanism, then you can skip to the bottom.


    1. The printing of money. The Federal Reserve prints money. The printing is electronic these days, so the use of paper notes is incidental, but the Federal Reserve prints money nevertheless.

    2. The creation of money. Money is actually created chiefly by private banks. The new money enters circulation via issue as bank loans: when the bank lends you a dollar, a dime of that dollar is money the bank possesses because a depositor has deposited it; the other 90 cents are just made up by the bank out of thin air. The first dime is significant, though: the Federal Reserve requires the dime to restrain the bank from issuing infinite loans.

    3. The creation of nonexistent money. But how can a bank make up the 90 cents out of thin air? The answer is, they just record the 90 cents in your checking account. That's it. The bank just writes the number down and, hey presto, you have money available to spend. “Available to spend” means that, if you write a check against the money in question, and the check's recipient presents it at the bank for payment, then the bank strikes the money from your account and adds it to their account.

    4. Propriety. But can a bank do that? They still don't have the 90 cents, right? So where do the 90 cents come from? I fear that the only answer is the baseball umpire's answer, for the umpire is by empowered by rule to issue, not money, but runs to each of the visiting and home teams. He didn't bring the runs with him in his pocket to the ball park that morning, but just made the runs up during the game and, as it were, added the runs to the teams' respective accounts.

    5. Currency notes. Twenty-dollar bills and such are incidental to the bank. The bank can order a case of twenty-dollar bills, delivered via an armored car, from its local Federal Reserve branch, but that's for your convenience, not the bank's. The bank doesn't care about currency notes as such.

    6. The other creation of money. Notwithstanding the aforementioned bank mechanism, federal law also allows the Federal Reserve as such to print money on its own. However, until recently, the Federal Reserve was constrained by law to use the printed money solely to buy U.S. debt on the open market. Here is how that works: [a] you, as a private person, lend the U.S. money by buying a Treasury note (or, alternately, the Chinese government lends the U.S. money by buying such a Treasury note, etc.); [b] before the note matures, you sell the note via your stock broker on the open market; [c] maybe a private person buys your immature note, but the Federal Reserve might be the buyer, paying you using the very money the Federal Reserve has just printed.

    7. Bidding up the price. Why does the last matter? Answer: because the entry of the Federal Reserve into the market for immature bonds bids up the price of immature Treasury notes, making immature notes less attractive to private buyers than those bonds would otherwise be. The last encourages private buyers to buy new notes rather than existing ones, even if the interest rate the Treasury notes promise is low.

    8. Low rates. But if the interest rate Treasury notes promise is so low, why don't private buyers buy corporate or foreign bonds, instead? Empirically, this isn't really an issue, because some Americans for various reasons of their own prefer an undefaultable federal bond in any case, especially when those Americans can turn right around and sell the bond to the Federal Reserve on the open market any time they want; but if it were an issue then Congress would make up the shortfall via taxation or, if Congress preferred, by granting the Federal Reserve extra powers or emergency powers as during 2020. One way or another, the money is going to get printed; and one way or another, a sufficient share of the printed money is going to land in the U.S. Treasury. The mechanism described in points 1 through 7 has thus far sufficed.

    9. Running out of money. But where do the private buyers get the money to lend? Don't they eventually run out? The answer is, no, because the Federal Reserve is continuously injecting new money via the aforementioned open-market purchase of immature bonds. The Federal Reserve can inject as much new money as it takes, until the money makes its way through the channels of commerce to the lenders.

    Got that? Money is printed, then injected into the economy as loans or via the Fed's purchase of immature bonds. Admittedly, unless you already know at least half the story, it's nearly impossible to take in at one sitting, but ...

    In simple to understand terms, ...
     
    ... well, I'm doing the best I can.

    10. Maturity. When immature notes the Federal Reserve has bought finally mature, the Treasury pays the Federal Reserve the notes' principal plus the originally promised interest. But where does the Treasury get the money to pay? Answer: partly from tax revenue; partly from the issue of new notes. Because of point 8 above, the money with which to repay never runs out.

    11. Distribution of profits. Upon receipt, the Federal Reserve just destroys the principal. The interest however is split into two funds: about 30 percent (if I read the financials correctly) is paid to the private banks that formally own the Federal Reserve as dividends; the other 70 percent, after the Federal Reserve's institutional operating costs are subtracted, is simply handed over to the U.S. Treasury.

    12. Fiat. One point that frequently confuses people is why the dollar has the special status it enjoys. If the dollar, then why not Bitcoin or Ethereum? What is to stop citizens from transacting in some other currency and leaving the dollar busted? The answer however is straightforward: you cannot pay your taxes using Bitcoin or Ethereum. Even if you pay no taxes, the vendors from whom you buy pay taxes. They require dollars to pay. This is the chief reason the dollar has fiat.

    I won't try to delve deeply into the question of whether the foregoing structure is wise. The structure has been stable for a long time, though, so one is reluctant to fiddle too much with it; and it has at least the virtue that it injects money into circulation, not at any one concentrated point, but by an insensible general seepage, operating simultaneously in every city and town in the United States, so long as the town has a bank branch or, better yet, a local bank. So, yes, it's not a bad system on the whole.

    Which finally brings us to your question:

    ... what does it mean that the Federal Reserve holds $8 trillion in US debt? Can the Federal Reserve hold $80 trillion in US debt without serious repercussions?
     
    Yes and no. Mostly yes.

    In the main, as a nation, we owe the money to ourselves. To the extent to which we owe it to foreigners, if the U.S. cannot afford to repay or does not wish to repay, then the U.S. will simply issue extra money to make the dollars repaid less valuable, thus effectively cheating the foreigner of part of his promised return. But as I said, in the main, we own the money to ourselves, so it doesn't really matter.

    Now, none of the foregoing is meant to excuse profligate fiscal policy. The printing of money creates no new wealth, but merely affords the Treasury cash with which to commandeer as much of the national wealth as the federal government may require, at private citizens' expense. By “wealth,” I mean goods and services. For example, if the government adds another thousand Ford sedans to its fleet this year, then that means (approximately) that a thousand citizens who would rather be driving new sedans will have to make do with their old sedans another year. It means, generally, that prices rise and/or wages fall.

    This has been a long answer, though hopefully no longer than necessary. Since the answer interests me at least, I thank you for affording me the excuse to write it! Perhaps the answer will interest someone else, as well.

    Meanwhile, I believe that I grasp the point that AE is making about the Fed's support of asset prices via zero interest rates. It is a sophisticated point and I think that you should give it careful consideration. However, I do not believe that, in and of itself, it portends the macroeconomical armageddon AE believes it does.

    Replies: @Buzz Mohawk, @anonymous, @Citizen of a Silly Country, @Daniel H

    This is an excellent summary of the money cycle. Thanks for writing it up. This is the closest thing to sense of this phenomenon that I have ever read. I’m going to save this and send it to lots of people who wonder how the logistics of our money policy works.

    • Thanks: V. K. Ovelund
  77. @V. K. Ovelund
    @anonymous


    That simply sounds too good to be true. The US government can run $5 trillion or whatever deficits indefinitely without serious repercussions?
     
    No, and Treasury Secretary Janet Yellen (who seems most competent) agrees with you, and so do I.

    However, [a] a fiat dollar has value within the United States chiefly because the person to whom you pay that dollar can use it to satisfy a tax bill; [b] there is no easy way to prevent private persons with dollars they don't need right now from just sitting on the dollars, effectively taking them out of circulation for the time being; [c] fewer dollars in circulation implies lower prices; [d] lower prices implies lower wages; [e] lower wages means wage cuts, and that demoralizes labor (logically, it shouldn't, as long as prices fall, too; but observably, it does); [f] besides point d, lower prices also cause some producers to sit on finished, warehoused stock, waiting for prices to rise; [g] the combination of demoralized labor and a warehouse already full of unsold stock prompts producers to idle assembly lines; [h] workers laid off due to idle assembly lines stop buying goods and services (unless they're getting COVID bucks!); [j] the lack of buying of goods and services causes yet more assembly lines to idle in a vicious cycle.

    The vicious cycle is, of course, a depression, which the Federal Reserve is tasked by Congress with forestalling by pumping up the money supply.

    The trick is to pump up the money supply enough to prevent prices from falling, without causing prices to rise too much; but we've got some fundamental problems in the last department, with no clean solutions, and with a Congress that is unserious about finding the solutions, anyway. That is the point at which AE's post at the head of this column picks up, so I would refer you back to that—except that you have already got there, yourself, for your comment is right. The present pumping of the money supply is becoming politically untethered from its proper aim, which (as we said) is to prevent collapse of prices.

    An expert would be better than I am at putting these ideas into plain language, incidentally. If any of it sounds airy and pompous, that's my lack of genuine expertise talking; so please pardon.

    Replies: @utu

    “which the Federal Reserve is tasked by Congress with forestalling by pumping up the money supply” – By what mechanism? Interest rate?

    • Replies: @V. K. Ovelund
    @utu


    By what mechanism? Interest rate?
     
    Yes.

    I am no expert, but have detailed my best understanding of the mechanism in a comment above. However, if the comment is read, then A123's correction regarding fractional-reserve mechanics wants to be read along with it.

    @A123

    I am still pondering your illuminating remarks regarding fractional-reserve mechanics. Apparently, I had a defect in my understanding as to precisely what, on a bank's balance sheet, counts as reserves and what does not.

    If you happen to know, how are paid-in capital and retained earnings counted as far as reserves are concerned, please? That is, if I own the bank and pay in another million in capital, does that boost the bank's reserves by a million?

    A similar question presents itself with regard to, say, a million dollars in after-tax retained earnings.

    (If you answer these questions, then further questions by me are likely, and only you can decide how much time you are willing to lend to answering! Nevertheless, as long as you are willing and able to answer, I mean to take advantage of the opportunity. I have wondered about these very points for years.)

    Replies: @A123

  78. @utu
    @V. K. Ovelund

    "which the Federal Reserve is tasked by Congress with forestalling by pumping up the money supply" - By what mechanism? Interest rate?

    Replies: @V. K. Ovelund

    By what mechanism? Interest rate?

    Yes.

    I am no expert, but have detailed my best understanding of the mechanism in a comment above. However, if the comment is read, then A123’s correction regarding fractional-reserve mechanics wants to be read along with it.

    I am still pondering your illuminating remarks regarding fractional-reserve mechanics. Apparently, I had a defect in my understanding as to precisely what, on a bank’s balance sheet, counts as reserves and what does not.

    If you happen to know, how are paid-in capital and retained earnings counted as far as reserves are concerned, please? That is, if I own the bank and pay in another million in capital, does that boost the bank’s reserves by a million?

    A similar question presents itself with regard to, say, a million dollars in after-tax retained earnings.

    (If you answer these questions, then further questions by me are likely, and only you can decide how much time you are willing to lend to answering! Nevertheless, as long as you are willing and able to answer, I mean to take advantage of the opportunity. I have wondered about these very points for years.)

    • Replies: @A123
    @V. K. Ovelund

    I primarily work much more with the numbers & data side of the subject. Accounting rules interpretation is its own world. I know some of that because I work on the reporting used by those teams, but I cannot promise 100% accuracy.

    My understanding is that in the fractional reserve mechanic, that reserve value is calculated based only on the lending cycle. Collection of new paid in capital would boost Equity & Assets without impacting the fractional reserve.

    The new Asset would be cash belonging to the bank, and thus it could be used to make loans starting at 100%. As it flowed back into the bank as a deposits the 10% reserve would apply as 90% is loaned out again. So each "new dollar" the bank raises can become multiple dollars in circulation.

    PEACE 😇

    Replies: @V. K. Ovelund

  79. A123 says:
    @V. K. Ovelund
    @utu


    By what mechanism? Interest rate?
     
    Yes.

    I am no expert, but have detailed my best understanding of the mechanism in a comment above. However, if the comment is read, then A123's correction regarding fractional-reserve mechanics wants to be read along with it.

    @A123

    I am still pondering your illuminating remarks regarding fractional-reserve mechanics. Apparently, I had a defect in my understanding as to precisely what, on a bank's balance sheet, counts as reserves and what does not.

    If you happen to know, how are paid-in capital and retained earnings counted as far as reserves are concerned, please? That is, if I own the bank and pay in another million in capital, does that boost the bank's reserves by a million?

    A similar question presents itself with regard to, say, a million dollars in after-tax retained earnings.

    (If you answer these questions, then further questions by me are likely, and only you can decide how much time you are willing to lend to answering! Nevertheless, as long as you are willing and able to answer, I mean to take advantage of the opportunity. I have wondered about these very points for years.)

    Replies: @A123

    I primarily work much more with the numbers & data side of the subject. Accounting rules interpretation is its own world. I know some of that because I work on the reporting used by those teams, but I cannot promise 100% accuracy.

    My understanding is that in the fractional reserve mechanic, that reserve value is calculated based only on the lending cycle. Collection of new paid in capital would boost Equity & Assets without impacting the fractional reserve.

    The new Asset would be cash belonging to the bank, and thus it could be used to make loans starting at 100%. As it flowed back into the bank as a deposits the 10% reserve would apply as 90% is loaned out again. So each “new dollar” the bank raises can become multiple dollars in circulation.

    PEACE 😇

    • Thanks: V. K. Ovelund
    • Replies: @V. K. Ovelund
    @A123


    The new Asset would be cash belonging to the bank, and thus it could be used to make loans starting at 100%. As it flowed back into the bank as a deposits the 10% reserve would apply as 90% is loaned out again. So each “new dollar” the bank raises can become multiple dollars in circulation.
     
    OK. Thanks to you, I think that I've finally got it. The explanation is too mathematical to try to explain to everybody with any degree of brevity, but when I sleep on it and then work it through with my pencil according to your advice, it makes sense.

    What I had not understood is that the 9:1 fractional-reserve ratio represents the sum of a geometric series rather than the leverage from a single deposit. The geometric series is a clever way of affording fiat leverage similar to the leverage specie once had, only specie could do it immediately, without the series, whereas fiat cannot.

    I suppose that a benefit of the fiat system is that a depositor cannot disproportionately drain a bank's reserves by demanding a large withdrawal in specie. All the depositor can do is withdraw fiat, because that's all there is.

    Very interesting.

  80. JL says:
    @V. K. Ovelund
    @JL


    This doesn’t make sense, why would the Fed be looking to decrease rates in the event of substantial price inflation?
     
    Because there was no substantial price inflation at the time. (Back in 2008, like many Americans, I mistakenly thought that there was or soon would be substantial price inflation, so I got the policy wrong; but after seeing that I had gotten it wrong, I started reading, and eventually learned a little of how it actually works.)

    The test is, now that inflation is starting to pick up (according to the treasury secretary, not me), will rates be raised? I'm with AE. I don't think that rates will be raised—not enough, anyway. Trouble will result.

    On the other hand, there probably isn't any other reasonable way to service the national debt but by keeping rates lower than one would like, so we'll see what happens.

    Replies: @JL

    Now neither of you are making sense. This is what AE wrote:

    the Fed has no tools in its toolkit to respond to this

    That’s much different than saying the Fed has tools but won’t use them, which is what you wrote.

    I mistakenly thought that there was or soon would be substantial price inflation

    But you’re right now? What’s different this time?

    • Replies: @V. K. Ovelund
    @JL


    But you’re right now? What’s different this time?
     
    Oh, I don't know. I have given my reasons, whether there or in various other comments, but you can supply your own reasons if you prefer. It's just an interesting conversation on an intriguing topic. I've nothing to prove.

    Meanwhile, could you be more specific? I would be glad to defend my position (or to admit my error, as the case may be), but am unsure which position of mine I am supposed to be defending.

  81. @JL
    @V. K. Ovelund

    Now neither of you are making sense. This is what AE wrote:


    the Fed has no tools in its toolkit to respond to this
     
    That's much different than saying the Fed has tools but won't use them, which is what you wrote.

    I mistakenly thought that there was or soon would be substantial price inflation
     
    But you're right now? What's different this time?

    Replies: @V. K. Ovelund

    But you’re right now? What’s different this time?

    Oh, I don’t know. I have given my reasons, whether there or in various other comments, but you can supply your own reasons if you prefer. It’s just an interesting conversation on an intriguing topic. I’ve nothing to prove.

    Meanwhile, could you be more specific? I would be glad to defend my position (or to admit my error, as the case may be), but am unsure which position of mine I am supposed to be defending.

  82. @A123
    @V. K. Ovelund

    I primarily work much more with the numbers & data side of the subject. Accounting rules interpretation is its own world. I know some of that because I work on the reporting used by those teams, but I cannot promise 100% accuracy.

    My understanding is that in the fractional reserve mechanic, that reserve value is calculated based only on the lending cycle. Collection of new paid in capital would boost Equity & Assets without impacting the fractional reserve.

    The new Asset would be cash belonging to the bank, and thus it could be used to make loans starting at 100%. As it flowed back into the bank as a deposits the 10% reserve would apply as 90% is loaned out again. So each "new dollar" the bank raises can become multiple dollars in circulation.

    PEACE 😇

    Replies: @V. K. Ovelund

    The new Asset would be cash belonging to the bank, and thus it could be used to make loans starting at 100%. As it flowed back into the bank as a deposits the 10% reserve would apply as 90% is loaned out again. So each “new dollar” the bank raises can become multiple dollars in circulation.

    OK. Thanks to you, I think that I’ve finally got it. The explanation is too mathematical to try to explain to everybody with any degree of brevity, but when I sleep on it and then work it through with my pencil according to your advice, it makes sense.

    What I had not understood is that the 9:1 fractional-reserve ratio represents the sum of a geometric series rather than the leverage from a single deposit. The geometric series is a clever way of affording fiat leverage similar to the leverage specie once had, only specie could do it immediately, without the series, whereas fiat cannot.

    I suppose that a benefit of the fiat system is that a depositor cannot disproportionately drain a bank’s reserves by demanding a large withdrawal in specie. All the depositor can do is withdraw fiat, because that’s all there is.

    Very interesting.

  83. A123 says:

    What I had not understood is that the 9:1 fractional-reserve ratio represents the sum of a geometric series rather than the leverage from a single deposit

    Yes. This is exactly right for the boundary condition mathematics.

    If you go back to domain – Is the optimum transform “number of fractional reserve cycles”? In one way that makes sense, however the business world is more friendly to time. I visualize “average fractional reserve cycles per unit of time”, so I can have “time”.

    Regardless of how you run the math the available time/cycles prevents the system from running to the boundary. Practical cases at 4, 8, & 12 cycles/year yield something on the order of 5:1 or 6:1 (rather than the boundary 9:1).

    One can always make models more complicated, and I simplified “new loans” for “loans issued” – “loans repaid”. At least in theory, there is another concept. As the economy tightens, business loans can be repaid faster than new business loans are issued against tighter credit standards. “New loans” can be negative. At some point the Fed needs to pull excess cash out of the system. However, fractional reserve deleveraging makes that task less daunting than it may first appear.
    _______

    The system is still “fiat” at the Fed and Treasury level. They can use various techniques to make as many dollars as they want. However, private banks operating fractional reserve can only ratio the money supply within the regulations.

    Deposits exceeds available reserves, so there is a “bank run” risk. Individuals tend to have deposits within the FDIC/NCUA limits, so that is mostly a corporate problem.

    PEACE 😇

  84. @Achmed E. Newman
    @Dumbo


    It seems to me that most people would be happy to try to keep both the stimulus check, PLUS the money they can get from working, but what do I know.
     
    I don't think it's the stimulus checks alone but still some sort of larger-than-normal unemployment checks that are keeping people at home. You don't get the money, of course, if you go back to work, on the books, that is. My friend's buddies who run a semi-decent restaurant say they've had to hire guys under the table, or they wouldn't come back in.

    A hotel manager told me just the other day, as she was rushing around to take care of something, that she couldn't get enough staff back.

    I agree that Big-Biz has been (coincidentally? Nah!) coming out the best during this Kung Flu PanicFest.

    Replies: @JR Ewing

    It’s just an old run of the mill Econ 101 indifference curve. Everyone has a preference level where

    $Gov + LeisureHours = $Wages

    Simply put, for labor participation to rise, $Wages just needs to be high enough to overcome the other side of the equation. But right now those $Wages simply isn’t close. Most people would prefer to sit at home and get less money than go get yelled at by a boss for more money.

    To solve this problem there are three possible solutions:

    1) Lower the value of $Gov

    2) Lower the value of leisure (i.e. make cable TV or video games or alcohol or whatever more expensive)

    2) Raise the value of $Wages

    Unfortunately, this gets back to the original point of this post: the first option is politically untenable and the second two are inflationary.

    No politician is going to willingly cut off the money supply because that can be directly traced back to him and is electoral suicide, ergo they will eventually be forced to let inflation explode because that’s harder to explicitly pin back onto individual politicians.

    In fact, they’ll just keep raising $gov in response right up to the very end like they’ve been doing now for 20+ years. (“Hey, I tried to fight inflation by giving you more money”… and most voters are ignorant enough to believe that)

    It’s not going to get fixed, everything is going to have to break first and get much much uglier.

    But we’ve been saying this for years.

    • Agree: Achmed E. Newman

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