Posted on 02/22/2015 8:13:01 PM PST by Jack Hydrazine
With the Federal Reserve printing trillions upon trillions of dollars to keep the economic system afloat, many investors and financial pundits have surmised that the fundamental economic problems facing the United States during the crash of 2008 have been resolved. Stocks are, after all, at historic highs.
But the insiders know different. And if there’s any single person out there who understands U.S. monetary policy and its long-term effects on domestic and global affairs it’s former Federal Reserve chairman Alan Greenspan. As the head of the world’s most powerful central bank for nearly two decades he’s privy to the insider conversations and government machinations that have brought us to where we are today.
Greenspan recently joined veteran resource analyst Brien Lundin at the New Orleans Investment Conference to share some of his thoughts. According to Lundin, the former Fed chairman made it clear that the central bank is facing a serious problem and one that will have significant ramifications in the future.
'We asked him where he thought the gold price will be in five years and he said “measurably higher.”
In private conversation I asked him about the outstanding debts… and that the debt load in the U.S. had gotten so great that there has to be some monetary depreciation. Specially he said that the era of quantitative easing and zero-interest rate policies by the Fed… we really cannot exit this without some significant market event… By that I interpret it being either a stock market crash or a prolonged recession, which would then engender another round of monetary reflation by the Fed.
He thinks something big is going to happen that we can’t get out of this era of money printing without some repercussions – and pretty severe ones – that gold will benefit from.'
Watch the full interview (at link):
f we are in fact staring a major market event in the face as Alan Greenspan proposes then wealth preservation should be a key tenet of any preparedness strategy going forward. Greenspan himself, somewhat ironically, was a gold bug and proponent of sound money prior to his appointment as the chairman of the Fed. And though he didn’t discuss it much during his tenure, he is now actively saying that we can expect to see gold markedly higher within the next five years.
His assessment is likely based on concerns over the U.S. dollar which will, as Lundin notes, more than likely suffer a currency devaluation at some point in the future.
"The end has to come at some point... If you look at a chart of the U.S. dollar index it has gone nearly parabolic in the last few months… In any market that is so one sided, that is accelerating so rapidly, that trend will end… it will most likely end in a fairly violent fashion."
And if gold rises as a result, so too will other resource assets in the energy and mining sectors. What it boils down to is that the assets that are necessary to keep our system operating will always have value, and that is especially true in a situation where the U.S. dollar happens to be crashing. Uranium , for example, powers one in five American homes, which means that it will always be a necessary resource, regardless of what the dollar does or doesn’t do. Lundin’s assessment is echoed by Uranium Energy Corp CEO Amir Adnani, who recently said we may well see a “resurgence” in the price of this and natural resources like gold.
The same can be said for oil and agriculture resources.
They will always have value, regardless of whether the dollar is strong or violently collapses under its own weight.
Thus, when we consider ways to preserve wealth and insulate ourselves from the coming destruction of our currency one must consider holding physical assets. For some that means stockpiling food and other supplies in anticipation of Greenspan’s market event that could adversely affect credit flows and delivery of essential goods. For others who may currently hold stocks, U.S. Treasurys, or cash, diversifying your portfolio with well managed resource-based companies will not only preserve wealth during currency volatility, but build it as the value of real, physical assets rises.
The man who is essentially the architect responsible for domestic monetary policy under four U.S. Presidents has now said that a significant market event will take place when the Fed is eventually forced to exit their monetary easing and zero-interest rate policies.
Are you prepared for that day?
How can “their cash flow, which has always been positive” ever “go negative”? If they can change a number in a computer (QE) and instantly have more cash?
Yeah, you were wrong.
Bottom line the are not ownership in a company or ownership of a government backed financial instrument.
Excellent. You got one right.
They are nothing but a bet on a mathematical formula.
Well, a Nymex oil future, for example, is based on 1000 barrels of physical crude oil. So simple, even you could do the math.
Derivatives are not real. they are just a vehicle to create an income stream
Income stream? LOL!
It's been fun pointing out your confusion. We should do it again, soon.
Well, if they pay out more in interest on reserves and in operating expenses than they earn on their bond holdings........
You assume so because you have trouble with basic reading comprehension.
From post 54 My words:"Oh you mean they do it all for free? Hahahaha Tell me how they make no money on trading derivatives they just do so from the kindness of their hearts.
That's silly, of course banks usually make money when trading derivatives.
You assume so because you have trouble with basic reading comprehension.
Your confusion comes thru loud and clear, no assumption involved.
Yes and it was I who pointed such out and you claimed I didn't know such. And as we see you were wrong, I was right. Thanks for playing.
Derivatives are basically a way for the institutions in the financial sector to create wealth for themselves
...You adjusted your claim. You're learning!
No sorry. An institution creates a contract and then sells it. No creation, no contract. Thus you create the contract to create wealth. QED.
Most people don’t understand the accounting for the Fed’s operations. For one thing, they can’t just change a number in a computer and get more cash.
>>Well, if they pay out more in interest on reserves and in operating expenses than they earn on their bond holdings........<<
Ah, someone who understands....
How do they “increase the monetary base” then? They don’t actually print more money.
Your opponent is getting the best of you in this argument Dawgg.
The created contract is essentially a bet between two parties. When it’s drawn up, no one has made money yet. That comes when the object of the bet moves in price, whether that’s oil prices, bond prices, interest rates, etc.
The reason such contracts exist is to enable various parties to either reduce risk or increase risk on their current positions, depending on their preferences. As for their being “real,” when the judge tells you you do indeed owe the money it will have a real impact on your wealth.
Although the Monetary Base does, indeed, include currency (printed money in the form of dollar bills), printing more dollars doesn’t increase the Monetary Base. That’s because the Fed doesn’t just give that new money to the banks; they trade it for excess reserve balances. So printing doesn’t increase the base because the new currency is offset by the reduced reserve balances (which are also part of the Monetary Base.) The Base stays unchanged.
The Fed increases the Monetary Base by purchasing securities from the banking system and/or its customers. When they purchase a billion dollars of securities, they issue a billion dollar credit to the bank’s asset position in the form of a new reserve balance on the books of the bank. That directly increases the size of the Monetary Base (which is composed of currency in circulation plus bank reserves) by the billion dollars involved in the transaction.
If a customer sold the bonds instead, the bank still ends up with the billion in new reserves, but instead of those reserves replacing another bank asset, the bonds they held in the above example, they are offset by a liability of a billion dollars in the form of a customer deposit. (The customer delivers the bonds to the bank in return for a billion dollar credit to his account. The bank then delivers the bonds to the Fed in return for a billion dollar credit to its reserves.)
That process used to get money flowing in the economy because banks wouldn’t just sit on unused (excess) reserves. However, now the Fed in all its wisdom first puts trillions of excess reserves into the system and then pays the banks to sit on them. If that sounds silly, it’s because it is. Essentially, the QE’s resulted in the Fed forfeiting the control it once had over the money supply. Now they just control bank reserves and the money supply goes in whatever direction it chooses, depending upon economic activity, interest rates, etc.
Whether the banks sit on them, or not, they cannot reduce the reserves in the system.
I’m not sure what your point is. I agree, the banking system has no control over the level of reserves. However, if the fed funds rate is, say, 4%, and they are not being paid to sit on the excess, banks will sell any excess in the fed funds market. In normal times, when the level of excess reserves was minimal the banks selling into the market wouldn’t drive the rate significantly lower, but their circulating them tended to boost lending and the money supply. (Granted, you might not believe that, depending upon how you look at money growth causation.)
Today, however, the rate can’t go up because bank selling would immediately drive it back down, so the only way to raise the rate is to raise the Interest Rate on Excess Reserves, currently only 1/4 of a percent (but still over 6 billion dollars per year at that rate.) Payment of that interest by the Fed, to the banks, tends to neutralize the excess to an extent, but it’s not really controllable anymore. If a bank sees a lending opportunity it can sell some reserves and replace that asset with a loan asset.
That means that the main governor on money supply growth is now bank regulations that limit loan growth via capital requirements. That’s a totally different mechanism than when they could just ease or tighten the fed funds rate to influence money growth.
Just that the fact that the Fed is paying 0.25% on reserves has no impact on the level of reserves. Those reserves would sit there, no matter what.
Today, however, the rate can’t go up because bank selling would immediately drive it back down, so the only way to raise the rate is to raise the Interest Rate on Excess Reserves
I agree. FYI, they're paying on all reserves, not just excess reserves.
That means that the main governor on money supply growth is now bank regulations that limit loan growth via capital requirements.
Correct. They haven't been reserve constrained for a while.
The created contract is essentially a bet between two parties. When it’s drawn up, no one has made money yet."
Ahhh and right there it is the same exact mistake TP made.
The post you are referring to was in post 68: "Thus you create the contract to create wealth."
Noticed I said "wealth" and not currency or money. And that is because I meant exactly that, Wealth.
And the economic definition of Wealth:
From dictionary.com: Weatlh:
3. Economics:
all things that have a monetary or exchange value. anything that has utility and is capable of being appropriated or exchanged.
So that would be QED
>>Just that the fact that the Fed is paying 0.25% on reserves has no impact on the level of reserves. Those reserves would sit there, no matter what.<<
Let’s assume that you’re correct, although I don’t believe you are. Why then is the Fed discussing raising the interest rate that they pay on reserves in the event of a tightening? All they’d be doing, if you’re correct, is giving the banks money unnecessarily.
In fact, if the Fed tries to raise short term rates by raising the fed funds rate to, say, 2%, no bank will willingly hold an excess position if they can sell it at 2%. But with 2.5 trillion in excess, they clearly hold sufficient reserves to drive the rate back to zero. The only thing stopping them from doing so is the Interest on Reserves.
I don’t see how you can argue with that, from the perspective of an individual bank. So, it’s not “no matter what.” If the Fed tries to raise the fed funds rate, they will be absolutely unable to do so without somehow dealing with the excess reserve situation, and draining 2.5 trillion will not be practical due to the effect on their portfolio value.
I, however, go further than that. I’m reasonably certain that were the banks to try to sell reserves into the market their actions would begin to generate a significant expansion in the money supply, and that the result would be much higher inflation thereafter.
And thanks for correcting me on their paying interest on required reserves as well. I wasn’t aware that they did, or had at least forgotten it. By the way, while confirming that, I found a NY Fed paper that asserts essentially what I’ve claimed above. Raising the rate paid on reserves is necessary if they are to raise the fed funds rate.
You already explained why. If they raise Fed Funds and leave the rate on reserves at 0.25%, banks will lend excess reserves and drop the Fed Funds rate back to 0.25%.
But with excess reserves so high, which banks even need to access Fed Funds?
I don’t see how you can argue with that, from the perspective of an individual bank. So, it’s not “no matter what.”
A bank lending reserves to another bank does not reduce the level of reserves in the system. That's all I'm arguing. The Fed could stop paying 0.25% and reserves would not change. The Fed could raise their payment to 4% and reserves would not change.
I, however, go further than that. I’m reasonably certain that were the banks to try to sell reserves into the market their actions would begin to generate a significant expansion in the money supply,
Who would they be "selling" reserves to?
>>A bank lending reserves to another bank does not reduce the level of reserves in the system. That’s all I’m arguing. <<
If that’s all you’re really arguing then I don’t see why we’re arguing at all because I completely agree, and never said otherwise. As we both know, only the Fed can control the total reserves in the banking system.
If we do disagree, it would appear to be on what would happen if the Fed didn’t neutralize the excess reserves by paying interest on them while at the same time trying to effect a tightening. It appears that we’ve agreed that they can’t leave the IOR rate at .25 and still increase the fed funds rate appreciably, so that leaves open the question as to how they would manifest a tightening, however.
I don’t think this line of discussion will lead us to what I suspect is where our real difference of opinion resides, that being the effect of changing the level of excess reserves on the overall money supply. The side taken by most is that a tightening indicated by raising the fed funds rate (and now, by necessity, the IOR rate) first impacts lending and economic activity, and that then feeds back into the money supply, causing it to drop.
I take the side that an increase in total reserves (via an addition to the excess reserves in the system) directly leads to money being created which then feeds first into financial markets and later into economic activity. The reverse of the cause and effect described in the first case. Of course, that is not the case when banks are paid to hold onto their excess, as they have no incentive to then circulate them. For it’s the circulation that generates the increase in money supply.
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