The Dam Begins to Break - Caleb Jones

Read the title of this recent CNN report: For a second day, the New York Fed spent billions to calm the financial market. The actual article is here. I’ll let it speak for itself:

For the second straight day, the New York Federal Reserve injected a huge sum of money into the financial system in a bid to calm stress in the overnight lending market. The Fed on Wednesday poured another $75 billion into the market following a $53 billion rescue by the NY Fed on Tuesday.

The Federal Reserve did what they always do, conjured $128 billion of your money out of nowhere and cheerfully handed it over to massive, corrupt, incompetent banks to keep them in business forever (that’s corporatism) instead of letting them go out of business (which would be capitalism, which we don’t have).

Now here’s the thing: this article was published almost three weeks ago. Did you hear anything about this? I didn’t and I tend to keep my eye on this kind of thing. I just heard about this yesterday. This is a really big deal, folks. The article says it itself:

Until this week, the Fed hadn’t launched an operation like this since 2008.

Remember 2008? That’s when the big, corrupt banks went begging to big government to give them hundreds of billions of dollars in free bail-out money, which big government gave to them. (Again, this is how corporatism works.) And today, we have even more debt than we did in 2008. That’s right; the financial system is in even worse shape than right before the crash of 2008.

Again, I go back to why you or I didn’t hear about this $128 billion given to the banks, the largest sum since 2008. Why is it that these New York banks who just received the $128 billion of your money for free didn’t have to ask the government for it like they did last time? Why did they just magically get it?

Answer: The Dodd-Frank Act big government passed back in 2010. This bill was created by Chris Dodd and Barney Frank, two of the most left-wing senators in all of American history. This bill contained numerous regulations of the big banks. Now wait… in a corporatist government, big business (and big banking) and big government are on the same team, so why would big banks allow all these regulations?

It’s because buried in this 2,300 page bill (it’s as big as three Game of Thrones novels, seriously) is a special clause where banks can simply suck money out of big government whenever the fuck they want without having to go ask for it. I’m oversimplifying all of this of course, but the gist of what I’m saying is accurate.

This means that thanks to left-wing politicians and right-wing Wall Street corporatists there here is now a permanent pipeline between big government and the big banks that permanently and near-constantly suck money from the Federal Reserve into the banking system.

That’s why this happened with so little fanfare. It was pretty much instant and automatic.

The fact these banks suddenly needed $128 billion to keep overnight lending rates south of 10% is not good. It’s a sign of very bad things to come.

As I’ve said before, these very bad things may come in two or three years or they may come in 25 years, but they’re going to come,and you’ll be alive when they happen.

As always, this creates the refrain from left-wingers, Keynesians, MMT guys and even some neocons when they say that “It doesn’t matter, we can print all the money we want, because we owe it to ourselves!”

This is factually incorrect and you can read why right here. My simple response is to ask these guys why our government doesn’t just print up enough money every January 1st to give every adult American a check for $100,000 tax-free and do that every year. That would be awesome! That would solve every economic problem in this country immediately, right? Why not do this? It doesn’t matter, right?  Because we owe it to ourselves, right?

Wrong. Of course it matters in that it would destroy our nation and our currency in short order. Sure, it might not matter right now. It might not even matter in ten years (Japan has been doing this crap for 25 years sustaining their depressing, zombie-like economy). But it will eventually matter. And you (and your children) will pay the price.

Alpha Male 2.0 financial structures, folks. Get your 2-4 small, international, location-independent Alpha 2.0 businesses going, pay off all of your debt, get some money in savings, hedge it with gold and get some solid non-Western investments going.

You’re going to really kick yourself in a few years if you don’t get started on these things now.

And you won’t have the excuse that you didn’t know or weren’t warned.

72 Comments on “The Dam Begins to Break

  1. Oh, look, media adding up overnight loans on consecutive days! It’s 2008 all over again. If it’s $53 billion for one night and 75 billion for one night, does it really matter? You lapped it up uncritically beacause it agrees with your ideas.
    If you’re on top of those things and you only heard after 3 weeks, doesn’t that tell you something about how irrelevant it is?
    I’m a trader and I can tell you it was all the rage in financial Twitter when it happened, and still no one could explain why it deserved attention. Your confirmation bias is showing, Mr Jones. If the repo thing is the sign of something to come in 2 to 3 years or in 25, then sorry, it’s the sign of nothing to come. I’m starting to think sometimes you have a warped view of things. Not everything is further proof of decadence, and certainly not an overnight loan.

    Debt grows because the economy grows, and that’s not even counting inflation! You sound like climate alarmists that refer to value of property destroyed by hurricanes. Of course it keeps making new highs, because the economy keeps getting bigger and everything is worth more, not because hurricanes are more destructive. 🙂

    I was pessimistic in summer last year but have liked the economic data lately. I think the economy will do just fine next year. And I would love to hear reasons why it’s bad to go the way of Japan. Haven’t been there but I only hear fantastic things about them. 🙂

  2. You are the first twot I have seen on this blog, Shura.

    What are you? Twelve?

    You forgot to add “neener neener” to you post while putting your thumbs in your ears and blowing raspberries.

    The more mature approach is to offer the data and and compare notes.

    The economy may or may not be on a crash course.

    The reality is NO ONE REALLY KNOWS.

    But you plan for things like this. Contigency plans. If it doesn’t happen then you are in no worse a position as an Alpha 2.0.

    But if you can’t feel it in your gut that things are currently not sustainable then go about your business elsewhere.

    Something is rotten in the state of Denmark

    ~Hamlet (Act-I, Scene-IV, Lines 87-91)

     

  3. If you’re on top of those things and you only heard after 3 weeks, doesn’t that tell you something about how irrelevant it is?

    If the repo thing is the sign of something to come in 2 to 3 years or in 25, then sorry, it’s the sign of nothing to come.

    Are these really your arguments?

    Are you even aware what you’re writing?

    I’m not joking. These are serious questions. I’m assuming you’ve either been having a really bad day today, or you’ve been drinking.

  4. You completely misunderstand what’s going on here.  First, the Fed isn’t “giving” the banks anything.  It’s a repo operation, which is basically an overnight asset swap.  The banks give up a bond and receive a reserve balance in exchange.  They can keep rolling that over, or swap back at any time. The bank gets a very small amount of interest from the repo agreement, that’s it.

    The reason that they haven’t done this since 2008 is because with the onset of the global financial crisis, the Fed conducted QE operations (which was also just an asset swap BTW) which flooded the system with reserves and sent the overnight rate to zero.  Therefore, for the past 10 years there was no point in trying to manage reserve balances in the way that the Fed did before the crisis.  The reason that they need to start doing this again now is that for the past several years since QE ended the Fed has been in the process of unwinding its balance sheet and returning reserve balances to more normal levels so that they can return to setting the policy rate via OMO (Open Market Operations), as they did before 2008.  Repos are the most common form of OMO, as opposed to outright bond purchases/sales, which are more rare (except during QE of course).

    Bottom line is that this news is really only important to policy geeks and bond traders.  And it has nothing to do with Dodd-Frank.  But yes, there was a flurry of activity on twitter and elsewhere when this was in the news by people who don’t actually understand how it works (which is most people).

  5. I’ve been overweight foreign stocks for quite a while now, waiting for the dollar to take a breather.  And Dammit, it’s not happening.

  6. https://www.visualcapitalist.com/currency-and-the-collapse-of-the-roman-empire/

    Rome managed to continue currency debasement for 200 years. That said, currency production technology has come a long way since then, so our debasement will probably occur in a shorter time span.

    The way I see it, the US is following the 3-centuries of hegemony model (which I pretty much came up with after reading about the 3 generations of wealth model for families):

    1800-1900: builds an empire/hegemony, capitalist economy, socioeconomic decisions driven by the upper class
    1900-2000: maintains the empire/hegemony, mixed economy (transitioning from capitalism to socialism), socioeconomic decisions driven by the middle class
    2000-2100: squanders the empire/hegemony, socialist economy, socioeconomic decisions driven by the lower class

  7. A few others share the sentiment that the U.S. is heading downhill. Mostly due to poor leadership

    By 2019, Orlov felt[16] that most of the ingredients precipitating collapse of the USA were in place, and that the one single ingredient still missing–a humiliating military defeat–was under way:

    The function of the US military is to intimidate other countries into letting the US buy whatever it wants by printing US dollars as needed . . . Once their ability to intimidate the world into submission is gone . . . all that will remain of the “richest country in the world” is a pile of worthless paper.

    Patrick J. Buchanan

    According to Patrick J. Buchanan, “Post-Christian America, in many ways, is beginning to mirror what we were once taught that the pre-Christian Roman Empire looked like.”[18]

    The Roman Empire, Byzantium, the Tatar/Mongol Golden Horde, and the Ottoman Sublime Porte all provided these two essential services—unhindered trade and security—in exchange for some amount of constant rapine and plunder and a few memorable incidents of genocide. The Tatar/Mongol Empire was by far the most streamlined: it simply demanded “yarlyk”—tribute—and smashed anyone who attempted to rise above a level at which they were easy to smash.”

    According to Dmitri Orlov, the American empire is “a bit more nuanced: it uses the US dollar as a weapon for periodically expropriating savings from around the world by exporting inflation while annihilating anyone who tries to wiggle out from under the US dollar system.”[19]

    Dimtry Orlov (not the hockey player)

    Dmitry Orlov argues that the US is now in a rapid decline, “retracing the trajectory of the Soviet Union in the early 1980s toward national bankruptcy and political dissolution”. Orlov argues that U.S. is bedeviled by “runaway debt, a shrinking economy, and environmental catastrophes to rival Chernobyl”. He believes that there are some parallels with the U.S.: outsized military spending, growing international debts and trade deficits, unwieldy governments, rigid ideology, ecological crisis, resource decline.[22]

    Paul Kennedy

    Kennedy argues that continued deficit spending, especially on military build-up, is the single most important reason for decline of any great power. The costs of the wars in Iraq and Afghanistan are now estimated to run as high as $4.4 trillion, which Kennedy deems a major victory for Osama bin Laden, whose announced goal was to bankrupt America by drawing it into a trap. By 2011 the U.S. military budget — almost matching that of the rest of the world combined — was higher in real terms than at any time since WWII.[21]

    According to a 98-page report by National Defense Strategy Commission, “America’s longstanding military advantages have diminished”, and “America’s ability to deter and, if necessary, defeat opponents and honor its global commitments have proliferated.” The report cited “political dysfunction” and “budget caps” as factors restraining the government from keeping pace with threats in what the report described as “a crisis of national security.” The report wrote that, to neutralize American strength, China and Russia were trying to achieve “regional hegemony” and were developing “aggressive military buildups”.[24] In 2018, air Force General Frank Gorenc said that the United States airpower advantage over Russia and China was shrinking.[25] According to Forbes, the military’s decline began when defense secretary Dick Cheney stopped a hundred major weapons programs 25 years ago when the Soviet Union collapsed.[26]American culture is in decline, according to Allan Bloom, E. D. Hirsch and Russel Jacoby.[27]

    Allan Bloom

    E.D. Hirsch

    Russel Jacoby

    Samuel P. Huntington

    American culture is in decline, according to Allan Bloom, E. D. Hirsch and Russel Jacoby.[27] Samuel P. Huntington also believes that the American culture and politics had been in a constant decline since the late 1950s, coming in several distinct waves, namely in reaction to the Soviet Union’s launch of Sputnik; to the Vietnam War; to the oil shock of 1973; to Soviet aggression in the late 1970s; and to the general unease that accompanied the end of the Cold War.[17] The rise of postmodernism since WWII has contributed to the decline of American culture, according to Goldfrab. Bloom observes that “instead of the pursuit of truth, there is an adolescent certainty that all is uncertain.” He criticizes his students for their relativism, narcissism and the decadence of love and friendship, pointing to such cultural icons as Mick Jagger, who portrays himself as a nihilistic rebel, both hetero and homosexual, embracing drugs and “the rock ideal of universal classless society founded on love.” Because youth bond with such decadent anti-heroes, they miss embracing the positive heroes of the past, never achieving a deep love for culture.[27]

    Though I don’t totally agree with the reference to Mick Jagger a doctoral dissertation could be written on the positive and negatives of such a portrayal. Nonetheless, most are not sophisticated or discerning enough to know when such attitudes should be expressed.

    William J. Bennett

    William J. Bennett argues that America’s cultural decline is signaling “a shift in the public’s attitudes and beliefs”.[28] The rate of maternal mortality has more than doubled in the U.S. since the late 1980s in stark contrast to other developed nations.[29] According to the Index of Leading Cultural Indicators, published in 1993, statistically portraiting the moral, social and behavioral conditions of modern American society, often described as ‘values’, America’s cultural condition was in decline with respect to the situations of 30 years ago, 1963. The index showed that there has been an increase in violent crime by more than 6 times , illegitimate births by more than 5 times, the divorce rate by 5 times, the percentage of children living in single-parent homes by four times, and the teenage suicide rate by three times during the 30-year period.[28] By 2015, around half of American children were born to an unmarried mother.

    Economy

    By 1970 U.S. share of world production had fallen from 40% to 25%,[2] While economist Jeffrey Sachs observed the US share of world income was 24.6% in 1980 falling to 19.1% in 2011.[23] The ratio of average CEO earnings to average workers’ pay in U.S. went from 24:1 in 1965 to 262:1 in 2005.[31][6] A survey carried out by Pew Research Center shows that a majority of American predicted the U.S. economy to be weaker in 2050. Also, the survey says, a majority of the people thought the U.S. would be “a country with a burgeoning national debt, a wider gap between the rich and the poor and a workforce threatened by automation.”[5]

    Most right wingers and some centrists believe that the American fiscal crisis stems from the rising expenditures on social programs or alternatively from the increases in military spending for the Iraq and Afghanistan wars, both of which would lead to decline. However, Richard Lachmann argues that If none of military or overall spending are pressuring the U.S. economy, they would not contribute to U.S. decline. Lachmann describes the real problem as “the misallocation of government revenue and expenditure, resulting in resources being diverted from the tasks vital to maintain economic or geo-political dominance.”[4] Kennedy argues that as military expenses grow, this reduces investments in economic growth, which eventually “leads to the downward spiral of slower growth, heavier taxes, deepening domestic splits over spending priorities, and weakening capacity to bear the burdens of defense.”[21]

    Longevity

    The U.S. placed 35th in a 2019 ranking of countries on health, vs Canada’s 16th-place. “Life expectancy in the U.S. has been trending lower due to deaths from drug overdoses and suicides.”[32]

     

  8. Redbaron I’m pretty sure you didn’t come up with that. It was Sir John Glubb in Fate of Empires who said it first but you might’ve came to the same conclusion.

  9. That inspired me to do some reading, and apparently Glubb (a Brit) may have been influenced by the German Oswald Spengler.

    Also. Lol Shura is a trader, which may very well mean Wall St. His motto is let them eat cake. Safe to say he is here to provide entertainment value.

  10. You completely misunderstand what’s going on here.  First, the Fed isn’t “giving” the banks anything.  It’s a repo operation, which is basically an overnight asset swap.  The banks give up a bond and receive a reserve balance in exchange.  They can keep rolling that over, or swap back at any time. The bank gets a very small amount of interest from the repo agreement, that’s it.

    I understand all of that. You have a tendency to take whatever I say literally and assume that I mean it literally; instead, I often use simple language in my articles so that most guys reading will understand. Always remember that most of the internet reads at a sixth grade level.

    None of what you said changes the fact that by doing these swaps they are increasing the monetary supply in the economy and artificially influencing both the value of the currency and interest rates. That’s the problem, not the specific methods they are using to do it.

    The reason that they need to start doing this again now is that for the past several years since QE ended the Fed has been in the process of unwinding its balance sheet and returning reserve balances to more normal levels

    I know that’s what they say, but that is not why they did what they did during in those two days back in September.

    You agree that there should be a limit to the amounts of these swaps they do, right? Or do you think they can do this with hundreds of billions or trillions of dollars whenever they want and everything will be more or less okay?

    I know hong kong is one of your favorite places. Would love to hear your analysis on the current unrest.

    Subscribe to my YouTube channel. The answer to your question is there:

    https://www.youtube.com/watch?v=von08-Eg65A&tA

    Deloitte offers economic outlooks and after living (or staying six months) in several countries they have rated I agree with and recomend their assessment and analysis.

    Yes, China is in for some very serious problems soon, on their way up. The overall trend will still be up, however.

  11. You have a tendency to take whatever I say literally and assume that I mean it literally;

    Considering the context of what you wrote, I don’t know how to take it other than literally.  You said:

    Why is it that these New York banks who just received the $128 billion of your money for free didn’t have to ask the government for it like they did last time?

    I was pointing out that they did not, in fact, “receive $128 billion of my money” for free.  They performed a swap for an asset of equal value, namely, a gov’t bond.  Value for value, exchanged on the open market.  That’s not giving anybody anything “for free”.

    and artificially influencing both the value of the currency and interest rates.

    Only if you believe that there is some “natural rate of interest” that the CB should try to hit and any deviation from that is “artificial”.  Yeah, I know, Austrian economics.  But that whole notion is extremely controversial.  But that’s a whole can of worms that I won’t expand on right now.

    I know that’s what they say, but that is not why they did what they did during in those two days back in September.

    Right, they’ve been aggressively taking reserves out of the interbank system for several years, and during those two days they had to add a little bit back.  There were trillions in excess reserves in the system before …. adding a hundred billion or so back is chump change in comparison and not a big deal.  The fact that they needed to do this is only an indication that reserves in the interbank system are becoming relatively scarce once again, which is just a sign that we’re returning to the pre-QA situation, where the central bank sets the benchmark rate via open market operations (OMO), and repo/reverse-repo operations are conducted as a matter of routine.  Interbank reserves are a closed system …. only banks, the fed, and the treasury have reserve accounts.  Banks can trade them between themselves, but only central bank OMO can affect the overall quantities in the system, which they do both to manage the overnight rate and guarantee the functioning of the payments system.

    You agree that there should be a limit to the amounts of these swaps they do, right? Or do you think they can do this with hundreds of billions or trillions of dollars whenever they want and everything will be more or less okay?

    Really, there is no such limit, so long as their exchanging value for value with assets that are close substitutes.  Holders of US gov’t bonds essentially *already* have money, and could already have easily sold/hypotheticated/repo’d those bonds for cash and spent the proceeds at any time.  The fact is that they didn’t, and won’t, because they are savers, not spenders, and they’re not going to change their behavior just because the fed enters the market.  So these operations don’t actually cause more spending in the real economy … they manage the level of bank reserves and that’s about it.  Also, don’t confuse this type of asset swap/monetary operations with the type of fiscal spending operation advocated by MMTers …. that’s a different animal and would require a different analysis.

    I’m going to guess that, like most people, you have a 19th century view of money and banking.  If you really want to get a handle on it I suggest the excellent primer by William Hummel at wfhummel dot net.  It is called Money: What it is and how it works.  You’ll be surprised what you’ll learn about things that you thought you already knew.  I’d also suggest Perry Mehrling’s course on money and banking on Coursera, but that’s a much bigger time commitment.

    I’m not a trader like Shura in the first comment …. my interest in this is more academic.  But he’s right, this was really a non-event, which is why you haven’t heard much about it.  As someone who actively trades those markets he’s in a better position to grasp that than most people.

  12. They performed a swap for an asset of equal value, namely, a gov’t bond.

    You’re talking about the internal bookkeeping of the Fed. I’m talking about what the banks received. The banks did indeed receive free money. They did not receive government bonds.

    Even if you argue there is some expectation that the banks will pay this money back someday, you know there are numerous scenarios under which they won’t or don’t.

    exchanged on the open market

    Incorrect. The Fed printing up magical money and writing IOUs to itself then handing cash over to the banking system is not the open market. Can you do such a thing? Can I? Nope.

    Right, they’ve been aggressively taking reserves out of the interbank system for several years, and during those two days they had to add a little bit back.

    Because of very serious problems with NY banks. Correct, just as I said.

    I’d like to see you argue that a corporation suddenly needing $128 billion in bail-out money is not a serious problem.

    There were trillions in excess reserves in the system before

    Yep, and that’s the problem.

    adding a hundred billion or so back is chump change in comparison and not a big deal

    I agree. In and of itself, taken in pure isolation, it’s not a big deal as compared to the entire US economy. I said it was indicative of other major problems coming.

    Really, there is no such limit, so long as their exchanging value for value with assets that are close substitutes.

    Great. Then answer my question none of you guys ever want to answer: Why doesn’t the Fed just sell a bunch of bonds to itself every year and cut a check to every American for $100,000, every year?

    Holders of US gov’t bonds essentially *already* have money

    No they don’t. Bonds are not money.

    The fact is that they didn’t, and won’t, because they are savers, not spenders, and they’re not going to change their behavior just because the fed enters the market.

    Forever? No matter what? China, Japan, the Saudis, US investors, et al, are never going to sell ever no matter what happens? That’s what you’re betting on, and you’re wrong.

    I agree they aren’t going to sell today. But I’m not talking about today. I’m talking about the future.

    So these operations don’t actually cause more spending in the real economy

    Great. Please show me links that indicate the TARP bailouts of almost 1$ trillion didn’t cause any more spending in the economy at any economic level and I’ll be happy to take a look.

    I’m going to guess that, like most people, you have a 19th century view of money and banking.

    Incorrect. I’m not 100% Austrian, as I’ve stated before. I agree that you can print up a hunk of money under certain conditions, at lot in fact, and have everything be more or less okay. I’m saying there’s a limit to what you can do, and that the USA (along with Germany and a few other nations) are pushing that limit and will hit it in our lifetimes.

    If you really want to get a handle on it I suggest the excellent primer by William Hummel at wfhummel dot net. It is called Money: What it is and how it works.

    I’ll take a look.

    I’m not a trader like Shura in the first comment …. my interest in this is more academic. But he’s right, this was really a non-event

    He could have been an adult and attempted to make actual points like you have so we could have a real conversation. Instead he chose to rant incoherently like a child and made guys on your side of the issue look really bad and guys on my side look more rational.

    which is why you haven’t heard much about it

    We haven’t heard much about it because A) the elites in the media agree with you and don’t consider it an important event (and they are wrong) and B) the elites do not want people hearing about any of this. Trump really wants to get re-elected so the corporatists in the banking sector and on Wall Street (and their media) going to suppress as much of this data as they possibly can, at least before November of next year. (And it will probably work. Tantrum Trump will probably get re-elected.)

  13. Much of what Ken wrote sounds like it has merit, but the problem is the general mental gymnastics it requires in order to bypass the basic principal of market mechanics. There is constructive criticism, and then there’s this…shortsightedness. That is the problem with pretty lies and it’s something I observe more and moreso these days. Feelz over realz. Now a hard rain is gonna fall, sooner or later. Except, when you try to tell others, they lash out at you for doing so. Honestly, I struggle with the notion that other people are even worth the effort sometimes. The gift of knowledge comes at a severe price.

  14. You’re talking about the internal bookkeeping of the Fed. I’m talking about what the banks received. The banks did indeed receive free money. They did not receive government bonds.

    Even if you argue there is some expectation that the banks will pay this money back someday, you know there are numerous scenarios under which they won’t or don’t.

    You’re confused.  The banks *gave* their gov’t bonds to the Fed, in return for reserve deposits.  That’s not “free money” because they had to swap something of equal value.  When either side decides they no longer want to roll over the repo agreement, they swap back.  If for some reason they can’t, then they don’t get the bonds back.  No free lunch.Incorrect.

    The Fed printing up magical money and writing IOUs to itself then handing cash over to the banking system is not the open market.

    The Fed can indeed create reserves just by enter numbers into a spreadsheet, and they’re unique in their ability to do so.  However, they cannot just “hand cash over to the banking system”.  They are prohibited by law (Federal Reserve Act and its various amendments) from proceeding in that fashion.  They have to purchase something with that money, and the FRA puts various constraints on what they can purchase.  So they go into market via the Primary Dealer (PD) network and bid on Treasury Bonds, just like anybody else in the Treasuries market, and pay market price.  Or enter into Repo agreements through via that same PD network.  That’s what OMO are.

    Because of very serious problems with NY banks. Correct, just as I said.

    I’d like to see you argue that a corporation suddenly needing $128 billion in bail-out money is not a serious problem.

    During normal, that is pre-financial crisis times, this is the kind of operation that the Fed did routinely.  They have not done it for 10 years because QE flooded the interbank system with reserves so there was never a scarcity.  Now that they have been unwinding their balance sheet and the system is no longer so flooded, you can expect that kind of operation to become routine once again.  It is not a sign of distress on the part of any bank …. they can still lend and borrow on the Fed funds market, but it would be at a higher interest rate.  However, that interbank interest rate is the very policy rate that the Fed is charged with controlling.  So if they don’t do these kinds of operations, they’ll overshoot their target rate to the upside, which they don’t want to do. Hence open market operations.  I think you’re probably confusing bank reserves with bank capital …. too very different concepts (and those references I gave you will help you sort them out).  When we talk about banks needing a “bailout”, it’s because they’re in danger of not meeting their minimal capitalization requirements.  That happened to quite a few banks during the GFC.  But that’s not what’s going on now … this is just a return to normal reserve/liquidity management by the Fed.

    Great. Then answer my question none of you guys ever want to answer: Why doesn’t the Fed just sell a bunch of bonds to itself every year and cut a check to every American for $100,000, every year?

    First off, they don’t “sell a bunch of bonds to themselves”.  The bonds that they buy are already financial assets held by the private sector, and that’s who they buy them from.  Simple asset swap, changes nobody’s net worth.  They can’t “cut a check to every American for $100,000” because the Federal Reserve Act would prohibit them from doing such a thing … that would be a fiscal operation that must be appropriated by Congress and conducted by Treasury.

    Second, if the Congress did decide to do such a thing, it would indeed be a problem.  Sure, they could force the Fed to clear the checks with money that the Fed creates, but that wouldn’t be exchanging value for value … that would indeed be handing out money for nothing and putting into the hands of people who are likely to spend it.  With production of real goods and services for sale in exchange for that $100,000, we would have a big inflation problem. Very different situation than the Fed swapping Treasuries for cash balances and back again in repo agreements.

    No they don’t. Bonds are not money.

    Depends who you ask, really.  Treasury bonds are not included in the current classifications of M0, M1, M2 (or discontinued aggregate M3), that is true.  In an earlier time they used to track an aggregate beyond M3 called “L” that did include at least some Treasury bonds. But many economists would argue that they are indeed close substitutes and should be included in the aggregates, and I would agree.  Nobody holding a Treasury has ever faced a liquidity issue if they wanted to spend.  They can be sold, used as collateral for bank loans (which are really bank created money), etc.  The Bank of England tracks a quantity they call M4 which does include various types of bonds.  I believe that the current classification system is a holdover form gold standard days and should be revised, and so do many other people.

    Forever? No matter what? China, Japan, the Saudis, US investors, et al, are never going to sell ever no matter what happens? That’s what you’re betting on, and you’re wrong.

    I’m not “counting” on anything.  If those entities someday decide to “sell”, that means somebody else “buys”.  All of my arguments here have nothing to do with what any of the actors that you mention ultimately do.  If they would rather hold cash than an interest bearing bond then that’s their problem. Unless you think they’re all going to go on a spending spree and start demanding real goods and services … then we could have an inflation problem if we can’t produce those goods in the quantities demanded.  Then we’d have to consider other measures like tax policy to dampen aggregate demand in this unlikely event.  Most people would consider this a high quality problem.

    Great. Please show me links that indicate the TARP bailouts of almost 1$ trillion didn’t cause any more spending in the economy at any economic level and I’ll be happy to take a look.

    Different animal.  TARP was a fiscal operation authorized and appropriated by Congress and conducted by the Treasury.  Not a monetary policy liquidity reserve operation conducted by the Fed. It was designed to address the bank capitalization issue, which is a different as I described above, by giving the gov’t an ownership stake in the banks (and also outright purchase of some distressed assets).  What the effects were and were not of that would be another whole discussion.

    Incorrect. I’m not 100% Austrian, as I’ve stated before. I agree that you can print up a hunk of money under certain conditions, at lot in fact, and have everything be more or less okay. I’m saying there’s a limit to what you can do, and that the USA (along with Germany and a few other nations) are pushing that limit and will hit it in our lifetimes.

    That part of my comment didn’t have anything to do with Austrian economics.  Most people, including many economists who don’t specialize in money and banking (i.e. most economists) believe we have a “fractional reserve” system …. but the banking and payments that we and every other country has today doesn’t resemble a 19th century FR system much at all … it has evolved and changed in many ways.  And it’s important to understand how it actually works if you want to understand what the Fed does.  Yes, there are obvious limits to spending in the real economy … you are constrained by the availability of real resources for sale in your currency!  But there you’re talking fiscal operations, which are different than these asset swaps that the Fed does, which is really just about managing the overnight rate.

    We haven’t heard much about it because A) the elites in the media agree with you and don’t consider it an important event (and they are wrong)

    Honestly it’s not that they agree with me, it’s that they for the most part don’t understand any of this.  So they did indeed get excited about for a few days, and then moved on to other things. Which is fine, because it isn’t really an important event.  It’s an interesting event, if you understand it in context, but we’ll soon be back to a time when repos happen every week, just like before QE.

     

  15. Caleb, I would appreciate it if you would put dates on your web pages.  It sucks to read an article, then find out it’s 3 years old and you wasted your time.  Right now you rock.  Please don’t suck like that.

    If the repos are overnight loans, is it proper to add them up and give a cumulative total?  It seems like each day would be a start over from zero.

    I’m also having trouble seeing how this is increasing the money supply.  The bank bought a bond — money taken out of circulation.  Now the fed lends them the money back — money put back in circulation.  Then they change back, since it’s overnight.  Net zero.

    QE was definitely an increase in money supply, since it was a permanent bond purchase.  Fed gov’t spends an extra $1 trillion a year by issuing bonds from nothing.  If you or I buy them, the money supply stays the same.  When the fed buys them with their magically conjured dollars it increases the money supply.  That is why gold went up and the dollar went down during QE.  Neither are responding to the repos.

    Not that any of this matters. The west is failing and it will get worse and worse as time goes on.

  16. Caleb, I would appreciate it if you would put dates on your web pages.

    Good idea. I’ll have my tech guy put dates on the bottom of the articles. Not sure if that will help your problem though. (I will not put the date at the top of the article; it harms traffic and engagement.)

    It sucks to read an article, then find out it’s 3 years old and you wasted your time.

    Reading an article I wrote 3 years ago is not a waste of your time. My advice and observations are still valid 3 years later. (It would only be a waste of your time if I was referring to a current event of some sort, but you’d have that figured out within the first paragraph of the article.)

    If the repos are overnight loans, is it proper to add them up and give a cumulative total? It seems like each day would be a start over from zero.

    Only if 100% of the balance were paid by these banks the very next day. Maybe they were but I doubt it.

    You’re making the assumption a lot of people make in that you’re assuming when these kinds of shenanigans take place the banks always pay 100% of the money back exactly when they’re supposed to. That is usually not the case.

  17. You’re making the assumption a lot of people make in that you’re assuming when these kinds of shenanigans take place the banks always pay 100% of the money back exactly when they’re supposed to. That is usually not the case.

    That’s not true.  It’s almost always the case.  If they don’t, they forfeit the bond and take a haircut on the deal.

    Then they change back, since it’s overnight.  Net zero.

    So long as both parties agree they just keep rolling it over each day indefinitely.  This was the fed’s most common way of adjusting reserves before the financial crisis, and will be again going forward.  Outright bond purchases or sales are more rare.

  18. The banks *gave* their gov’t bonds to the Fed, in return for reserve deposits. That’s not “free money” because they had to swap something of equal value.

    We’re both saying the same thing just using different words. They exchanged bullshit IOUs they should have never had in the first place for money (and I realize you don’t think it’s money) and you’re saying these things are of equal value and I disagree. But we could go round and round on this so lets agree to disagree.

    The Fed can indeed create reserves just by enter numbers into a spreadsheet, and they’re unique in their ability to do so. However, they cannot just “hand cash over to the banking system”.

    Again, potato patoto. You’re a very literal guy. Just because they don’t actually and them stacks of 100 dollar bills doesn’t mean they’re not getting money. It ends up being the same thing (or so similar the distinctions don’t matter).

    During normal, that is pre-financial crisis times, this is the kind of operation that the Fed did routinely.

    I know. They shouldn’t have done it then either (ideally). Doesn’t change my opinion.

    if the Congress did decide to do such a thing, it would indeed be a problem.

    Good. We have some agreement.

    TARP was a fiscal operation authorized and appropriated by Congress and conducted by the Treasury. Not a monetary policy liquidity reserve operation conducted by the Fed.

    Again, I know that, that’s not relevant to my overall point. Despite their differences, both TARP and these swaps are creating money (and I know you don’t consider it money) artificially. And I’m pretty sure you probably supported TARP when it happened when I was completely opposed to it.

    We’re both starting to repeat ourselves now, so the bottom line is that you don’t consider bonds or cash reserves as money, and I do despite the limitations you’ve outlined. I agree that these swaps are less bad than TARP or handing everyone $100,000 a year, but I still think they’re a problem, and we are approaching the limit of what we can do with this stuff. If I’m wrong and you’re right, you have nothing to worry about, carry on, vote for Joe Biden, and enjoy. I’ll be in New Zealand.

  19. so the bottom line is that you don’t consider bonds or cash reserves as money

    The opposite, actually.  I consider them both to be money.

     

  20. but I still think they’re a problem, and we are approaching the limit of what we can do with this stuff.

    Well, they’re the time honored way for central banks around the world to hit their target policy rate.  How would you do it then?

  21. Again, potato patoto. You’re a very literal guy. Just because they don’t actually and them stacks of 100 dollar bills doesn’t mean they’re not getting money. It ends up being the same thing

    Wasn’t trying to make a distinction between printed currency and virtual account balances … that wasn’t my point at all.  My point was they can’t just “give” either to the banks or anyone else …. they can only trade for it or loan it on good collateral.

  22. Well, they’re the time honored way for central banks around the world to hit their target policy rate. How would you do it then?

    I’m against the entire concept of having a central bank. So were men like Jefferson, so I’m in good company. If “time honored” means a 95% decrease in the value of the US dollar in the last 100 years, I don’t “honor” that like you do.

  23. If “time honored” means a 95% decrease in the value of the US dollar in the last 100 years..

    Why is that important to you?  I’m sure you don’t hold cash as a store of value over that long of a time horizon.  You invest in real assets and only maintain cash balances as required to meet your short term liquidity needs.  In that short run time frame real depreciation of those cash holdings due to inflation is small.  And as a consequence of the modern system we no longer have to deal with the sort of bank runs and panics which were once common. I count that as a good thing on net.

    You shouldn’t care what *one* of your dollars will buy in 2019 vs 1919, but rather what *all* of your dollars will buy now vs then. I think you’ll find that you’re in command of much greater real wealth than someone living back then would have been.

    Of course my original question was narrow and technical and asked in the context of the system we actually have … but if you want to take it broad and philosophical and discuss the system you think we ought to have …. that’s fine.

  24. Why is that important to you?

    You don’t know why it would be important to me to spend 5 cents on a loaf of bread instead of three dollars?

    I’m sure you don’t hold cash as a store of value over that long of a time horizon.

    I don’t because, unfortunately, I’ve had to spend hundreds of hours researching these topics, but a hell of a lot of other people do. The typical saver who does save over a long time horizon doesn’t do this and gets completely fucked by your system. It’s theft and it’s wrong.

    we no longer have to deal with the sort of bank runs and panics which were once common

    I know you won’t be able to understand this, but that’s exactly part of the problem. Failures like that are critical to a thriving, capitalist system. I want these occasional failures, I want occasional recessions. These things regularly clean the morons and corrupt assholes out of the system, and force new companies (and new banks!) to be much more careful in the future so as to avoid them. It fair and enforces improvement. Your system keeps the morons and corrupt assholes running the system forever, constantly getting rewarded for their failures and theft, screwing all of us.

    We’re getting way off-topic though. If you want a strong central bank that keeps these horribly corrupt thieves enriched and in power over you, that’s great, good luck with that. I don’t. But let’s agree to disagree.

  25. You don’t know why it would be important to me to spend 5 cents on a loaf of bread instead of three dollars?

    I really don’t.  If my income is $1000K and bread is 5 cents if I live in 1919, vs my income is $60,000 and bread is 3 dollars if I live in 2019, it’s the same thing as far as my quality of life.

  26.  Failures like that are critical to a thriving, capitalist system. I want these occasional failures, I want occasional recessions.

    We have recessions.  What we don’t have is bank panics.  People don’t need to worry about their deposits or stuff money into a mattress.  Again, I think that’s a good thing.

  27. The typical saver who does save over a long time horizon doesn’t do this and gets completely fucked by your system.

    The typical saver with a long time horizon doesn’t usually hold large amounts of cash … more likely mutual funds in IRAs and 401Ks.  The fund managers do the research for them.  People who don’t have access to these things are usually too low income to save anyway and are living paycheck to paycheck.

  28. It’s theft and it’s wrong.

    So in the pre-central bank error, when banks could fail at any time and most people would lose their deposits …. that’s not theft?

  29. Haha, wow, everything you just said is inaccurate, but like I said, we’re way off-topic so I’m done discussing this here. The next time I ask for volunteers to debate me publicly on any topic (which I will be doing soon), I expect you to be first in line to debate me on this topic so you can show the world how wrong I am.

  30. The next time I ask for volunteers to debate me publicly on any topic (which I will be doing soon), I expect you to be first in line to debate me on this topic so you can show the world how wrong I am.

    Maybe.  I’d be more likely to take you up on that on a neutral forum where you don’t unilaterally set the ROE.  But I won’t rule it out.

    Haha, wow, everything you just said is inaccurate

    Haha to your haha.  It isn’t, but if I were to take the time to unpack everything you said here that is either inaccurate or shows a complete lack of understanding of the current system, we’d be here for a year!  Which is a problem …. if we can’t even agree on the baseline facts and functionality of the current setup, not sure where we’d even begin on debating its merits or what might work better.

  31. It isn’t, but if I were to take the time to unpack everything you said here that is either inaccurate or shows a complete lack of understanding of the current system, we’d be here for a year!

    I am guessing its probably an exaggeration / joke on your part but if it would really need to take that long to explain it you are either extremely bad at explaining or don’t have any understanding yourself. You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

  32.  You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

    Well, I tried.  Read the thread.

  33. but if it would really need to take that long to explain it you are either extremely bad at explaining or don’t have any understanding yourself. You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

    No. This gets told a lot but in many cases it’s BS.

  34. No. This gets told a lot but in many cases it’s BS.

    Yeah you’re right.  On complex topics the background knowledge needs to be there first.

  35. The typical saver with a long time horizon doesn’t usually hold large amounts of cash … more likely mutual funds in IRAs and 401Ks. The fund managers do the research for them. People who don’t have access to these things are usually too low income to save anyway and are living paycheck to paycheck.

    @Ken Based on your knowledge and understanding of the financial systems and markets, what are some ideas that you think make sense for mitigating risk, in regards to individual investors (at almost all levels of savvy and wealth), over the next 5-30 years?

    I would appreciate it if you would put dates on your web pages

    @Stephen Also just a heads up, you can just check the date of the first comment to get a general idea when the article was posted.

    Thanks!

  36. @Ken Based on your knowledge and understanding of the financial systems and markets, what are some ideas that you think make sense for mitigating risk, in regards to individual investors (at almost all levels of savvy and wealth), over the next 5-30 years?

    Well, as I said earlier, my interest in this is academic … I’m interested in understanding the economy.  I don’t trade these markets and I’m not qualified to offer that kind of advice.  I think everything I’ve said here is understood at least intuitively, if not explicitly, by the people who are in the bond or forex markets and that all of this knowledge is already baked into current prices.  So I wouldn’t know which way or what to bet on any better than anyone else.

    I would say be wary of conspiracy theories …. don’t, for example, bet again the dollar just because Caleb says that “the dam is breaking”.  Do the research, figure out how the system really works, and then make your best judgement.

    For mitigating risk, all I can offer is the conventional wisdom, which is diversify, and don’t put all of your eggs in one asset class.  Sorry I can’t be of more help.

     

  37. For mitigating risk, all I can offer is the conventional wisdom, which is diversify, and don’t put all of your eggs in one asset class. Sorry I can’t be of more help.

    Thanks for the response, and solid investment knowledge, thanks!

    While I am certainly interested in practical applications, I also am interested in an “intellectual” manner as well. For example, how would a 17th-century blacksmith best diversify an their investment portfolio?

    I do like to hear different viewpoints to challenge what I hold to be true, to learn more, to be exposed to different ideas, etc. It doesn’t mean I agree with a framework/conclusion, but intellectually (as an amateur) I willing to entertain the possibility.

    Beyond traditional diversification (stocks/bonds/international) scenarios, I haven’t stumbled upon much research/whitepapers/analysis of other diversification strategies.  I’m sure it’s out there, but I’m still looking to fill in the gaps in my spare time 🙂 And it seems to me there’s really only 50-100 years of data to pull from, which isn’t really that long, depending on your point of view.

    And, diversification doesn’t always change the risk/reward ratios, either.  Plus, what falls within the 1st/2nd standard deviations doesn’t always cover some more extreme possibilities, which may magnify over over a longer period of time, right?

    Also, as an aside, while I’m not an expert, this is an interesting book for people who might like a longer-term look at economics, etc.  I feel like many people overlook this view point when talking about macro-trends about wealth, etc.

    https://en.wikipedia.org/wiki/The_Great_Wave_(book)

  38. Thank you for the article.

    I don’t see how anybody could look at $128 billion dollars of bailout and not recognize it as a symptom of a much larger problem.

    -John

  39. I don’t see how anybody could look at $128 billion dollars of bailout and not recognize it as a symptom of a much larger problem.

    Of course it is and anyone implying it isn’t is defending political bias.

    Caleb is biased too but at least he admits it.

    Guys like Ken are just dancing around. He said bonds aren’t money then he turns around and says they are. He said he doesn’t mind if bread goes up in price as long as his income does but wages have been flat since the early 70s and prices have still increased. I bet he knows that but it undermines his entire view so he doesn’t mention it. He equates bank failures to theft. Comical.

    It’s so crazy to watch intelligent people try to justify this bullshit.

    And no Antekirtt, you’re wrong, if you can’t explain your point in a paragraph or two it says something about your point. Or your ability to make one.

  40. I don’t see how anybody could look at $128 billion dollars of bailout and not recognize it as a symptom of a much larger problem.

    Easily, if you understand that it wasn’t a “bailout”.

  41. but if it would really need to take that long to explain it you are either extremely bad at explaining or don’t have any understanding yourself. You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

    No. This gets told a lot but in many cases it’s BS.

    Actually, no, your point is BS. It always reminds me of that Alex Jones conspiracy theorist guy who, when I asked him to back up an insane point he made here, told me to go read a 400+ page book. I asked him to summarize his point instead, and he was welcome to take several paragraphs to do it if needed. No, he said, he couldn’t do that, his amazing, high-minded “point” was too complicated, and I had to read a 400+ page book to understand his “point.” Which, of course, meant he didn’t have one.

    Imagine the (warranted) backlash I’d get if I ever said something to one of my readers like, “I can’t summarize it; it’s to complicated, go read the 440 page book The Unchained Man, then you’ll understand what I’m saying.”

    I’ve noticed the view of “sorry, my point is way too complicated so I can’t explain it in a few paragraphs” is always made by academic geek types; high-IQ college-educated guys who live in a world of book learning.

    It’s bullshit. Even high-end quantum physicists with a modicum of communication skills can summarize a very complicated or controversial point in a paragraph or two. It really isn’t that hard… provided you have a real point to make.

  42. He said bonds aren’t money then he turns around and says they are.

    Read the thread … I was quite constant … it’s Caleb that keeps twisting things around 🙂 I contended the entire time that bonds should be considered a form of money.

    but wages have been flat since the early 70s and prices have still increased.

    You mean *real* wages have been flat.  The qualifier “real” meaning adjusted for inflation.  People are not making the same in nominal terms as in 1970. Now, I don’t think that’s ok …. I think real wages, as well as the minimum wage, should rise along with productivity.  But that’s a different point from the inflation story.

    And if you’re lucky enough to have enough income to save some long term, absolutely nobody is forcing you to hold those savings in depreciating cash … you have lots of options.

    Even high-end quantum physicists with a modicum of communication skills can summarize a very complicated or controversial point in a paragraph or two.

    No they can’t.  At least not to anyone who doesn’t already understand the topic.  Popular writers like Brian Greene or Max Tegmark can do a pretty good job of explaining their work at some level to lay readers, but it takes them an entire book.

    I thought I laid out my case pretty well, but if you want to listen to somebody who does it much better, check out the latest episode of the Macro & Cheese podcast, released just 3 days ago:

    Repo Mania: Has The Fed Bailed Out Wall Street Again? with Nathan Tankus.

    I won’t link to it, because I’m not sure I can do that here without going into moderation purgatory, but easy enough to search and find.

  43. It really isn’t that hard… provided you have a real point to make.

    Conspiracy theory points are very easy to make, so you have the advantage here … your points pretty much rely on your reader’s ignorance of the more complex reality.

  44. Actually, no, your point is BS

    It’s very hard for you to argue without strawmanning and false dichotomies, eh? I never said the alternative is to ask someone to read 400 pages. But no, “a few simple sentences” is sometimes not enough. If Ken can’t back his point with a few relatively lengthy comments, then yes that’s a problem. I have already done debates on this blog or the other with pretty insanely long comments, when I felt it was warranted. There is no problem with your refusing to answer them if your time management rules dictate it, but it changes nothing.

    Nope, that idea is BS. In fact you yourself have resorted to recommending reading books, eg Henry Hazlitt’s ‘economics in three lessons’. Sometimes brevity doesn’t work well, doesn’t provide the background necessary to fully understand the impact of a short argument, etc. I never said a brief comment never works, I said ‘in many cases’. And when someone actually takes the time to develop a point and you have trouble refuting it, your copout is to call it nitpicking. If it’s too nerdy for you to discern superfluous nuance from highly impactful nuance, it’s not my problem. A complex idea that one forces into a very small format easily ends up being two or three arguments by assertion that can’t by themselves establish anything.

  45. But no, “a few simple sentences” is sometimes not enough.

    2-3 normal sized paragraphs in a blog comment is enough to explain any point one could make – true or false?

  46. 2-3 normal sized paragraphs in a blog comment is enough to explain any point one could make – true or false?

    Ridiculously false.

    And btw I did write out a more detailed response last night but it appears to be stuck in your system somewhere.

  47. I’m with you Antekirtt. Although to be fair to old Henry H, he did claim to explain everything you need to know about economics in one lesson, not three.  I don’t think he succeeds; a think a few more lessons would be apropos 😉

  48. 2-3 normal sized paragraphs in a blog comment is enough to explain any point one could make – true or false?

    False, and obviously so.

    ….and here’s where you conclude that I’m either crazy, or stupid, or the way we see things is so different that it would take you more than 2-3 paragraphs to make me realize I’m wrong.

    Here’s what Ken said:

    if we can’t even agree on the baseline facts and functionality of the current setup, not sure where we’d even begin on debating its merits or what might work better.

    and

    You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

    Well, I tried.  Read the thread.

    You had a back-and-forth, and he concluded the two of you diverged so strongly that you needed to first sort out all your baseline facts before any meaningful debate can take place. Yeah, he’s entitled to that conclusion and yeah, that would take more than two paragraphs.

    Not only that, but in reality your criticism applies to you, if it applies to him. Here’s what you said earlier:

    Haha, wow, everything you just said is inaccurate, but like I said, we’re way off-topic so I’m done discussing this here. The next time I ask for volunteers to debate me publicly on any topic

    It is you who were the first to conclude that too much was wrong in his comments – ie, too much divergence between your two POVs, as I said above – to close the matter quickly. You think major divergence in the understanding of the US economic system can be resolved in 2-3 paragraphs? HAHAHAHAHAHA. (Side note: err, do you remember how threads looked like back when you allowed free will discussions? You think those were resolvable with clever, concise summaries of each person’s view? No, not even close. Google the Dennett-Harris exchange on the topic. Same thing for the transhumanism thread a couple years back.) I stand by what I said. The little rule of thumb is true sometimes, and many other times it’s bunk.

  49. Bluegreenguitar, check out Warren Mosler’s story from “The Seven Deadly Innocent Frauds of Economic Policy” (free pdf) regarding his discussions with the Italian finance minister …. he actually did make a pile of money by using his knowledge/understanding of these things.  But I suspect the trick isn’t repeatable, and besides, I can’t get any finance ministers to take my calls.

  50. I’m with you Antekirtt. Although to be fair to old Henry H, he did claim to explain everything you need to know about economics in one lesson, not three

    Thanks, memory failed me there.

  51. And btw I did write out a more detailed response last night but it appears to be stuck in your system somewhere.

    And now it has appeared.  I’ve yet to figure out what sends certain posts into moderation hold here.  I thought it may be inclusion of links, but just avoiding those wasn’t good enough apparently.

  52. False, and obviously so.

    ….and here’s where you conclude that I’m either crazy, or stupid

    …or completely irrational because you’re angry. I will demonstrate.

    I very clearly did not ask if it took 2-3 paragraphs to hash out an argument between two people. I very clearly did not ask if it took 2-3 paragraphs to resolve a difference between two people regarding a complicated topic. I asked if it took 2-3 paragraphs to explain a single point.

    The fact I need to spell that out for you, when my comment was quite clear, should indicate something to you. (It also means I’m done discussing this topic with in you this thread, since now you’re wasting my time.)

    So you’re completely strawmanning what I said, either because you know I’ve cornered you or because you’re so upset you’re not thinking rationally. I’m not sure which, though I know this is not the first time you’ve become visibly upset because of something someone said on the internet, which is immature and dumb. But more on that in a minute.

    You never need more than 2-3 short paragraphs to explain a single point you have when you are challenged on that single point. I’ll prove it. I’ve spent the last 10 years debating highly controversial issues with hundreds of people who disagree with me. There have been times where I said an answer to a question would be “more than I could describe in a single comment,” that’s certainly true. But I have never, ever had someone challenge a single point I made and responded with, “Sorry, my point is just too complicated, I’d have to write a page or two (or more) to explain my point.” Not once. Ever. Go back through my comments if you don’t believe me. Because you never need more than 2-3 paragraphs to defend a single, individual point you’ve made. If you seriously do need to write more than that explaining your single point, then either you have no point or your communication skills are severely lacking.

    More importantly, see how despite the fact Ken completely and utterly disagrees with me, he has kept a cool head and rational demeanor during this entire discussion? Can you say the same? Look at the tone of your comments and the tone of his. Learn something from that.

    Emotional control, my son. It’s a good thing. It’s critical to long-term happiness. Work on it.

    Thanks for playing.

  53. Um, CJ, I hate to make a point that JOTB used to make (okay no I don’t lol), but nope, I wasn’t pissed. I won’t say that was just “passion” as he used to say, but it wasn’t anger at all. If you applied the same judgement to your comments as to mine, you’d perceive yourself as far more pissed and/or defensive than me; but I don’t think you’re really capable of that (is this last sentence a sign of anger and immaturity? hahahaha. Self-reflectiveness, Caleb). And no, I didn’t strawman you, because the disagreement between you and Ken was precisely about a fundamental difference in your respective perceptions of the US economic system, which was why he said (and you yourself implied, BEFORE he did) that it would take too long to untangle it. YOU distorted the situation in order to “corner” me with one of your “simple questions” that solve everything. As I said earlier, the core of your tactics when you can’t refute something is to try to provoke the other person and then, whether it works or not, to suggest that they did get pissed off and use that ad hominem fallacy to conclude that you’ve won. Whatever floats your boat.

  54. None of this debate will change the status quo, so it’s real value is to help this audience decide whether to trust our financial system not to go broke and plan their affairs accordingly.

    Surely anyone who thinks that the reckless mortgage backed lending greed of the banks that led to the GFC (which I recall was spurred on unchallenged by almost every academic economist in the world, who used to talk about things like “innovation”), and their subsequent confiscation via government of trillions of dollars of ordinary people’s money to keep themselves in business was all part of an “acceptable” monetary system is either deluded or dishonest. Social welfare for banks is as anti-capitalist as you can get.

    To suggest that ordinary Americans should simply accept that their hard earned money is only short term currency that will become worthless over time, and that they should park their savings in more sophisticated instruments is concerning for two reasons: 1) it is unfair and unrealistic to expect those who are not financially sophisticated (which means most people) to understand this and deal with the consequences effectively and 2) it is unfortunately entirely true – property, stocks and gold are a much better stores of value than today’s money.

    I find it interesting that modern money’s giant shortcoming – which is that it is nothing more than a short term, ever devaluing currency – does more than anything else to fuel the real estate and other asset pyramid schemes that the money lenders thrive on. Citizens  who can save are forced to pay interest to banks in exchange for loans that allow them to buy inflating assets like real estate, otherwise they face being robbed of their savings by the very inflation that the banking system manufactures.

    I am not a banker or a financial economist so feel free to point out flaws in any of the following commentary. As I understand it, the US central banking model is theft by definition. Why? Because the expansion of the money supply to match the economy’s requirements relies on the endless issuing of new bonds by the Government in exchange for ‘money’ that the Fed issues out of thin air, that the American taxpayer is then compelled by force to pay interest on. The result is that the Government’s debt can never be repaid because any new money created within the economy also carries an interest burden. If I’m wrong, feel free to provide another explanation for the trillions of dollars of US Government debt now in play. This could all be avoided by having Treasury issue the money directly, which is precisely how Andrew Jackson paid off the national debt after taking on the bankers (and why Trump put a picture of him in the Oval Office). If you want a longer explanation of this critique of central banking, watch a documentary called The Money Masters. I’m happy for you to critique that too.

    Bottom line? It is clearly naive to assume that 2008 washed all the malinvestment and dodgy financial practices out of the system and that a much worse crisis isn’t possible (or probable) in your lifetime – CJ’s whole point. So just make a few contingency plans. Not so you can wallow in a scarcity mindset of pessimism and paranoia, but so you can feel more abundant, organised and unfazed by financial markets as you live your best life.

  55. Surely anyone who thinks that the reckless mortgage backed lending greed of the banks that led to the GFC

    I find it interesting that when I go to the website of the documentary that you reference (The Money Masters), on of their main complaints is the increase in bank capital requirements under the Basel accords …. requirements that are explicitly designed to discipline and curb the type of bank behavior that you speak of.

    and their subsequent confiscation via government of trillions of dollars of ordinary people’s money to keep themselves in business

    Except that never happened.  If you’re talking about the TARP, that was $700 billion, not “trillions”.  If you’re talking about the various Fed operations and rounds of QE, those were merely asset swaps, as I explained earlier.  Nothing was “confiscated” from anyone.  I think it’s fair for you to be critical of the TARP, since that did involve taxpayer money (unlike QE).  However, even in that case, the government ended up making, not losing money, from that deal.  That doesn’t make it the right thing to do, but it does mean that no taxpayer money was ultimately surrendered to the banks.

    their hard earned money is only short term currency that will become worthless over time

    Over a long enough timeframe, yes.  Currency is a depreciating asset.  In the United States and most developed countries that timeframe is rather long …. we don’t tend to have high inflation here.  Currency is designed to be spent, not hoarded.  The “medium of exchange” and “store of value” functions of money are in tension with each other, and history has shown that it’s difficult or impossible to optimize both.

    it is unfair and unrealistic to expect those who are not financially sophisticated (which means most people) to understand this and deal with the consequences effectively

    I don’t know.  I think people who are fortunate enough to have money to save over a long enough time horizon (i.e. not people living paycheck to paycheck) where inflation becomes a factor pretty much know that holding it in non interest bearing checking account is not the best idea.  Savings accounts, CDs, etc are readily available.  Money market and mutual funds also abound, often provided and promoted via people’s jobs.  So I don’t think it’s as hard as you imply.  I think it would be more unrealistic to expect them to deal with a 19th century style banking system, where they’d need to be sophisticated enough to judge the soundness of their bank and the chance that they’d lose all of their money in a panic.

     

    Citizens  who can save are forced to pay interest to banks in exchange for loans that allow them to buy inflating assets like real estate, otherwise they face being robbed of their savings by the very inflation that the banking system manufactures.

    No, they’re not forced to do this.  As I outlined above, there are plenty of more conservative options available for savings, that don’t require any borrowing at all.  People speculated on real estate because they got greedy and had dreams of getting rich, not because this was their hedge against inflation.  But of course I agree that we need more effective financial regulation to reign in such destructive bubbles.

    Because the expansion of the money supply to match the economy’s requirements relies on the endless issuing of new bonds by the Government in exchange for ‘money’ that the Fed issues out of thin air, that the American taxpayer is then compelled by force to pay interest on.

    Well, if the Fed really did buy all of the governments bonds (they don’t ….), then there would be no net interest paid.  The interest that the Fed earns on gov’t bonds gets paid back to the Treasury, so it would be a wash.  Most bonds are sold and held by the public, not the Fed.  The Fed generally tinkers around the edges, buying, selling, or repoing these securities to hit their interest rate target.  This feels like a narrative that you’re getting from the documentary that you mentioned.

    The result is that the Government’s debt can never be repaid because any new money created within the economy also carries an interest burden.

    Sure it could be.  In fact, during the late 90s when the US gov’t was running surpluses for a few years a lot of serious people were projecting that this was exactly what was going to happen.  The reality is that it doesn’t need to be paid off and from a macro standpoint, running that kind of consistent surplus would not be wise.  You mention Andrew Jackson … his payoff of the national debt was quickly followed by a bad recession.

    This could all be avoided by having Treasury issue the money directly, which is precisely how Andrew Jackson paid off the national debt

    You’re thinking of Lincoln’s greenbacks.  Jackson paid down the debt by selling land.  I don’t disagree that the essential functions of the Fed could be moved to the Treasury.  I’m not beholden to the neoliberal obsession with “independent” central banks.  Actually having the Fed simply buy up all of the debt issued by the Treasury would amount to the same thing as what you suggest.

    If you want a longer explanation of this critique of central banking, watch a documentary called The Money Masters.

    It’s a 3 and a half hour documentary, which would be a big time commit.  I went to their web page as I mentioned and started reading, and I was not impressed.  They seem hopelessly confused.  I’d recommend William Hummel’s tutorial that I mentioned earlier in the thread if you want to get a good start at really understanding things.

    and that a much worse crisis isn’t possible (or probable) in your lifetime

    Sure, it’s possible.  I don’t see one on the horizon right now, but it could happen.  I do believe, however, that U.S. Treasuries are going to continue to be the asset that folks flock to for safety when crises happen.

    So just make a few contingency plans.

    Can’t argue with that.

     

  56. As the recent videos on the channel already suggest (plus the older article, “how bad will it get”), the timeframe for the collapse, if the collapse happens, is rather wide. Since our ability to predict the future is already terribly limited long term, many things could change in that interval (technological black swans come to mind, which previous articles have acknowledged as a small possibility), so imo the tide itself could turn multiple times meanwhile. But we shouldn’t ignore current trajectories either.
    By 2060, the West becoming a 3rd world shithole seems extremely dubious, but gradually decaying into 2nd world status (or partially, ie retain some residual 1st world aspects but become 2nd world on *many* fronts), is quite plausible. People accustomed to 3rd or 2nd world living conditions may not mind, though the collapse could still be a problem if it’s gonna involve huge riots or small-ish civil wars… If you don’t do TMM and if you make sure you have savings (of a nature that won’t quasi-nullify them in case of crash, hahaha), the collapse (depending on if it’s sudden or very gradual) may hit you much harder than someone with a rock-solid 2.0 setup and less hard than the average guy. But even those too lazy to do a full or partial 5-flags should at least have multiple income streams, preferably location-independent.
    All in all, I expect that such a collapse carries more emotional harm than objective harm for someone who already has a solid lifestyle (and zero of both if you have sky-high OI): it’d be pity for the West to get downgraded this way, especially that the places currently rising aren’t what you’d call bastions of freedom, lol. But at the individual level, someone who has his shit together won’t feel much worse if he moved from Western Europe to Romania, so he won’t feel much worse if Western europe turns into Romania (ish).
    Personally it might just be the PC culture, especially if it’s gonna get much worse, that eventually persuades me to relocate.

  57. I find it interesting that when I go to the website of the documentary that you reference (The Money Masters), one of their main complaints is the increase in bank capital requirements under the Basel accords …. requirements that are explicitly designed to discipline and curb the type of bank behavior that you speak of.

    Their assessment is that raising capital requirements in the environment prevailing at that time exacerbated the 2008 GFC – their allegation is that by initially creating an environment of loose lending then curbing the availability  credit to create a squeeze in lending markets is the method bankers have used over centuries to concentrate their ownership and power.

    This feels like a narrative that you’re getting from the documentary that you mentioned.

    That “narrative” i.e. scepticism of privately owned central banks dates back to people like Thomas Jefferson. The classic critique is found in the book The Creature from Jeckyll Island where the author explains that the ‘Fed’ is neither “federal” nor a “reserve.” It is not owned by the federal government, and it does not hold real assets in reserve. In reality, it is a giant debt factory backed by the “full faith and credit” of the government, or taxpayers. That narrative is one that an awful of lot of intelligent people subscribe to (even though that book has a conspiratorial tone).

    No, they’re not forced to do this.  As I outlined above, there are plenty of more conservative options available for savings, that don’t require any borrowing at all.  People speculated on real estate because they got greedy and had dreams of getting rich, not because this was their hedge against inflation.

    Poor people were sold dreams by greedy companies that used the low interest rate environment to ram debt down their throats. Sure, many of the ignorant punters would have been ‘greedy’ in the sense of being naive as to the sheer unlikelihood of their being able to service the loans. But to sit back and say that “they did it to themselves” displays something of an ivory tower perspective towards the uneducated masses. The truth is that many of them had no idea that they couldn’t actually afford to buy a house. The fact that they hoped to better their prospects in life has to be viewed with a degree of compassion – the courts were certainly capable of seeing that.

    Sure it could be.  In fact, during the late 90s when the US gov’t was running surpluses for a few years a lot of serious people were projecting that this was exactly what was going to happen.

    Really? The United States owes $183,000 per taxpayer and currently has $125 trillion in unfunded liabilities.  I’ll bet you one dollar that the US Government defaults on its debt instead of paying it off, Winthorpe 😉

    It’s true that it was Lincoln who issued greenbacks, thanks, but it was Jackson who took on the banking cartel and paid of the debt for the last time in US history. Also, there  were a range of causes for the temporary panic which followed some years later. And on the subject of panics generally, those who pushed for the Fed legislation in 1913 used the same argument to get their scheme passed. I find it interesting that the most painful depression in living memory happened right after the crash 16 years later in 1929.

    The nuances of repos and other banking practices are quite obscure to a layperson, even to well educated people who haven’t studied banking. It’s been a some time since I looked at this stuff so I appreciate your referral to William Hummel’s primer – but I know enough about the pernicious historical influence of these organisations around the world over several hundred years to know that more detail about their current operations isn’t going to change the big picture.

    I don’t think the central banking model is exclusively a neoliberal Kool Aid either. If anything the central bankers’ long term agenda is socialist, but that’s for another time. I’ve certainly never heard the vast array of pro democrat media organisations criticise the Fed’s existence. They gulp that stuff every day.

    Interesting thread.

  58. their allegation is that by initially creating an environment of loose lending then curbing the availability  credit to create a squeeze in lending markets is the method bankers have used over centuries to concentrate their ownership and power.

    A bit too fiendish and conspiratorial for me.  I think Basel is an attempt and a process to establish a consensus on how to discipline banking, and keep them from taking excessive risks and inflating asset bubbles .  I may or may not agree with everything they come up with, but I don’t think they’re evil in the way you suggest.

    It is not owned by the federal government

    While the formal ownership structure is a bit bizarre and needlessly complicated, I’d say that the Fed is for all intents and purposes a government agency.  It would be better if that was made explicitly clear like it is in other countries, but for political reasons it was deemed necessary at the time of the its formation to pretend otherwise.  The chairman is appointed by the President.  None of their policy decisions can directly benefit their members.  We can take a deeper dive on this if you like.

    and it does not hold real assets in reserve.

    So I take for granted that what you mean by “real assets” is precious metals … mainly gold.  At the time of the Fed’s founding, up until 1934, they did hold such assets. And up until the demise of Bretton Woods in 1973, they were responsible for maintaining the official dollar to gold redemption price. Now, of course, we’re in a different era, where all major currencies are fiat currencies, and their job has evolved to be the price setter and lender of last resort in a very narrow and peculiar market … overnight interbank lending.

    it is a giant debt factory backed by the “full faith and credit” of the government, or taxpayers.

    I can’t make sense of that.  Sure, they offer collateralized lending at the discount window to member banks, and from time to time do repo operations, which is really another form of collateralized lending, but not sure how this makes them a “giant debt factory”.  They only lend on good collateral and that collateral is worth more than the proceeds of their loans.  Which is why the recipients of those loans hardly ever walk away from them, contrary to what Caleb suggests, because in doing so they would take a haircut on their collateral.

    But to sit back and say that “they did it to themselves” displays something of an ivory tower perspective towards the uneducated masses. The truth is that many of them had no idea that they couldn’t actually afford to buy a house. The fact that they hoped to better their prospects in life has to be viewed with a degree of compassion – the courts were certainly capable of seeing that.

    I agree with you on that, and I’m sorry if what I said struck you otherwise.  My point was that nobody was forced into real estate speculation as a hedge for their long term savings against inflation.  Nobody was sucked in to real estate speculation for that reason … they were sucked in to get rich.  And yeah for sure the banks played that for all it was worth to them, which was despicable behavior.

    Really? The United States owes $183,000 per taxpayer and currently has $125 trillion in unfunded liabilities.  I’ll bet you one dollar that the US Government defaults on its debt instead of paying it off, Winthorpe

    Owes what exactly?  Fiat dollars that the United States government can freely issue.  There’s no operational reason that they would ever have to “default” on this obligation … they can *always* meet any payment due that is denominated in USD.

    And on the subject of panics generally, those who pushed for the Fed legislation in 1913 used the same argument to get their scheme passed.

    Right, because after the panic of 1907 we were tired of depending on the “good will” of private money men like J.P. Morgan to step up and rescue the system from complete collapse.  We wanted to find a better way. But there still needed to be at least the illusion of private control, for political reasons, which is why the formal structure of the institution is as byzantine as it is.

    I find it interesting that the most painful depression in living memory happened right after the crash 16 years later in 1929.

    Well, I would agree that the Fed didn’t completely have its act together at that time and made mistakes.  What I don’t agree with is the Milton Friedman/Anna Schwartz narrative, as laid out in “A Monetary History of the United States” and other later and more popular Friedman writings such as “Free to Choose” which actually *blame* the Fed for causing the great depression.  This is nonsense.  If you want a thorough rebuttal of that view, which is very popular amongst libertarians and conservatives, see Peter Temin’s “Did Monetary Forces Cause The Great Depression”.

    I would also say that the Fed learned something by the time of the 2008 crisis. Ben Bernanke spent his whole academic career studying the great depression and all of the sudden in 2008 he was the man on the spot.  He largely subscribed to Friedman’s school of thought about 1929 and was determined not to repeat the mistakes made then.  The 2008 crisis could have been every bit as bad as the great depression (which is not to minimize how bad it really was and how many people it hurt).  But for the most part there weren’t major bank panics in 2008.  When a really big bank, Wachovia, failed, depositors lost nothing, and unless they closely followed the news they really didn’t know that anything had happened, until the sign on the door changed to “Wells Fargo”.  Yes, you could find all sorts of problematic things in the way this was handled, and I’d probably agree with a lot of them, but still, nobody really felt that their deposits were at risk, unlike in earlier eras.

    I don’t think the central banking model is exclusively a neoliberal Kool Aid either

    I didn’t say that “central banking” was a neoliberal shibboleth … I said *independent* central banking was.  In other words, the idea that there is this institution, somehow independent of the rest of the government, that should carefully manage interest rates or even (channeling Friedman) the “money supply” to achieve full employment and price stability, while the fiscal agent (e.g. the U.S. Congress) should maintain or at least aspire to, some sort of spending discipline.  In other words the so called “New Monetary Consensus” which had its heyday in the 1990s when we called Alan Greenspan “Maestro” …. as if he was actually in control of things.  In this thread I’ve attempted to explain what the Fed does and why it does it with respect to maintaining the policy overnight interest rate, but do not mistake that as an endorsement  of this (neoliberal) method of steering the economy.  I believe that fiscal policy, as determined by the U.S. Congress,  is much more versatile and effective for this purpose and that we should just park the policy interest rate at some agreed upon value (maybe even zero) and leave it there.  In other words, leave it to the CB to maintain the integrity of the clearing and payments system, or even move this function into the Treasury, but relieve them of their (neoliberal inspired) macro economy steering mandate, which they really can’t effectively fulfill anyway.

    If anything the central bankers’ long term agenda is socialist, but that’s for another time. I’ve certainly never heard the vast array of pro democrat media organisations criticise the Fed’s existence.

    That’s kind of a laugh to me … they don’t really have an “agenda” at all, let alone a “socialist” one … they’re bankers and technocrats. If anything they buy into the neoliberal new monetary consensus and try to do that job, ineffective as it really is. And even if they did have some “socialist” agenda (lol), I have no clue how central banking would get us there.  Also,  I’ll tell you for a fact that the misunderstandings and conspiracy theories surrounding the Fed are at least as robust on the left as those that circulate in libertarian or right-wing circles.

     

  59. I’m sure it would have been thought provoking, Ken. It’s refreshing to be able to test different perspectives rationally.
    On that note I want to go on a quick tangent and point out that scepticism about modern banking and financial markets can lead guys into massive distractions from their own real world  priorities. Reading Zero Hedge etc and obsessing about the sky falling in can prevent a person from figuring out how to take real action to create wealth (hint: real estate, done right), which will be made despite market fluctuations.

  60. That post may still show up.  I can’t figure out the rhyme or reason for why some things get delayed for days here.

    But yeah, if you make real world decisions based on conspiracy theories you’re probably asking for it, unless you’re lucky.

  61. Ken thanks for your post, which was as interesting as expected – will read again.

    Re my hint, it’s just that there is only one place where a punter gets to borrow 80-90% on their capital to acquire a relatively stable income producing investment with no margin calls if it suffers a temporary drop: real estate. Massive leverage – I wish I got this early on. For a primer look up  the Forbes article:
    “Why Real Estate Builds Wealth More Consistently Than Other Asset Classes”
    When you’re surrounded by inflation, debt is an essential weapon to get ahead and property is the only collateral the banks take seriously.

    Side note: limit the stock plays (index funds) to saving up a deposit, and otherwise for retirement accounts.

    Thoughts?

     

     

     

  62. A couple more things:

    There’s a widespread view, which I think Caleb holds, that the Fed’s response to 2008, far from reflecting lessons learnt, merely prolonged the real reckoning. Deutsche bank’s share price has fallen from $120 to $6 – and the collapse of that corporation has to at least suggest the possibility that the derivatives market will blow up internationally. Some people are attributing the September repo ops to DB related problems in money markets.

    Re socialism, there is a school of thought that the Fed banking model is progressively weakening and hollowing out the US from the inside so that it can eventually cede authority to an international monetary authority, whose nature would be socialist and totalitarian.  Proponents view central bankers as strategic protagonists working for hidden interests rather than harmless technocrat policy wonks. The left’s extreme tilt towards socialism in the last three years certainly fits the conspiracy lol.

  63. Yes, I get why you say those things about RE.  They are good points.  The thing that intrigued me about what you said was the “done right” part.

  64. far from reflecting lessons learnt, merely prolonged the real reckoning.

    Well, I wouldn’t say they did everything right, but they really didn’t screw anything up either.  Things like QE were mostly ineffective and did neither much harm nor good, but the integrity of the payments system remained intact, the credit system didn’t entirely freeze up, and people didn’t have to worry about their deposits.  Of course, the presence of institutions like FDIC had a part in that as well.

    I have no idea what this “real reckoning” is supposed to be, but it’s not something I’m much worried about.

  65. Some people are attributing the September repo ops to DB related problems in money markets.

    As I’ve said upthread …. there were two major drivers.

    One is that reserves are starting to become more scarce once again, as a result of the Fed unwinding its balance sheet from the earlier QE operations.  So at some point we return to more regular reserve levels and repo ops once again become the norm, not the exception, and they stop making news.

    The other one is that as a result of increased reserve retention requirements leveled on “systemically important financial institutions” (this requirement is the actual link to Dodd-Frank, which is different than the one that Caleb proposed), some very large banks need to hoard much larger reserve balances to comply with regulatory requirements than they previously did.  That means more reserves are required overall in the system for the interbank market to continue functioning smoothly. Thus the need to begin doing repos again even before the Fed’s balance sheet returned completely to a pre-2008 baseline.

    I doubt that this has anything to do with DB and whatever its problems may be.

    Remember that only the Fed can add or subtract reserves from the system, as it is a closed loop.

  66. there is a school of thought that the Fed banking model is progressively weakening and hollowing out the US from the inside so that it can eventually cede authority to an international monetary authority, whose nature would be socialist and totalitarian.

    My school of thought is that they’re simply maintaining the integrity of the deposits and clearing/payment system, so that I can keep some money in my checking account and pay my bills without having to think or worry about it.  Yeah, I know, that’ll be scant comfort when I’m in the gulag.

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