The Money Supply Cartel Cuts Borrowing Rate For The 11th Time This Year

CBS Marketwatch ^ | 12/11/2001 | Rex Nutting

[Deuce]

by the way do you see any authority in the constitution to print paper money

Article 1, section 8, Clause 5: Congress shall have the power to coin money and regulate the value thereof;

Article 1, Section 10, Clause 1: No state shall emit bills of credit (i,e, paper money, even if redeemable in gold or silver) or make anything but gold or silver coin a payment for a debt;

The Coinage Act of 1792, which explicitly defines the dollar as 371 1/4 grains of silver, was the act which instituted the obligation mentioned in Article 1, section 8, clause 5 above.

This is what the constitution said about money. Clearly, the states gave up their right to make anything but gold or silver money; the congress was given the right to act and in 1792 they did. It defined a dollar as 371 1/4 grains of fine silver.

Since none of these provisions has been amended or repealed, not only is the Federal Reserve an economic catastrophe but unconstitutional as well.

[mlocher]

not only is the federal reserve an economic catastrophe, but unconstitutional as well

thanks for the data.

it would appear to me that the federal reserve is in violation of the coinage act of 1792. where am i wrong?

[Deuce]

it would appear to me that the federal reserve is in violation of the coinage act of 1792. where am i wrong?

Worse. It's unconstitutional. For more information on the Constitutional issues see Edwin Vierra's article at:

The Constitutional Imperative In Reform Of The Monetary And Banking Systems Of The United States

[spoosman]

(did not have time to check for typos)

Not a new subject at all.

In the fiat banking system, a dollar is created only when it is exchanged for an instrument of debt. What that means is unless somebody makes an application to the central bank to inure themselves to the bank for what is called a 'loan', then 'money' is not created. That means that there is not a 'primary' means of money to get into circulation.

The very existence of money in this fiat based system is evidence of a debt. In order for the debt to be repaid, the 'created' money issued with the debt origianlly must be extinguished. Therefore, on this point, there can be, in the fiat system, no money without debt. A federal reserve note, a federal reserve credit, what they euphamistically call a dollar, is thus leased to the holder in due course in order that the holder can facilitate an exchange. But the note is still the property of the original issuer. That means the value of the note is subject to whatever forces the original issuer puts into play at any given moment. The value of that 'dollar' cannot be relied upon over a period of time as a result. Historically speaking, since this fiat game got started, the cause for the value unreliability has been the continued inflation of the money supply by the issuer of dollars -- the money supply cartel. This means the holder of this debt instrument has little incentive to 'save' it, and because of it's ability to depreciate over time, it cannot be relied upon to purchase in the future what it can purchase in the present, so its 'storage' value is of little consequence.

Having been placed in this precarious situation, people that would rather build wealth by trying to 'save' have to get rid of that instrument of debt as soon as possible, and trade it for another asset that they thing will be a better store of value. Three that come to mind are precious metals, real estate, and stocks, the latter two being, apparently, the favorite choices, with stocks being the most favored.

Yet, because stocks and real estate asset value are denominated by the money supply cartel's fiat debt instrument, their federal reserve notes, the other side of this two-edged sword comes into play. If in the process of the money supply cartel having to inflate into infinity to stay in business Newton's Law kicks in, then Humpty Dumpty falls off that wall, and prices of the places of storage (in this case stocks and real estate) collapse, and our poor old holder of those debt instruments, so 'generously' leased to us by the money supply cartel so we can buy bread, loses anyway.

A fiat economy is a debt economy, and therefore is subject to a vastly higher degree of risk and volatility than an economy that has money secured by gold, and/or something of that nature. I am arguing against a fiat debt economy where we lease our money from the bank, but we own nothing as a result, because the value of what we own is always subject to what the cartel dictates. If it were simply a matter of genuine, legitimate market forces, that is something I gladly embrace. I am willing to take an honest risk, but the game played is totally dis-honest.

It is clear, then, that no original, newly created money can come into existence unless it is exchanged for debt. The instrument of debt is created first, then the 'money' is created. The original issuer of all money in the fiat system we operate under is the money supply cartel, and they have this position because they were empowered by the Federal Reserve Act of 1913 to do so.

Once the cartel receives the debt, and the 'money' is exchanged, that money then goes into 'circulation', and is added to the money supply. Once an original dollar is issued, then others who hold those dollars can tinker with that dollar, making the dollar multiply itself. In fact, with the advent of the derivatives game, our original set of primary dollars ha mushroomed into a gigantic secondary market, which has had a mushrooming effect on the money supply as well.

But just how do those primary dollars get into circulation? People go to the bank, and inure themselves to the bank. Who do you suppose is the money supply cartel's largest customer? If you answered the US government, move to the head of the class.

The US govt is not unlike any other 'customer' of the bank. They do not get the 'money' unless they first create an instrument of debt, and then present that to the 'bank'. Why would the 'bank' loan money to the US govt? Why, the loan is secured by the good faith and credit of this fair country, dontcha know. The primary source of new money comes from US Treasury 'borrowing' from the cartel.

This has been going on for years, and years, and years, and years. It is completly irrelevant that the cartel sells most of that debt to foriegn govts, or whoever wants to pick it up in the secondary market. They, having a monopoly on the creation of debt, make an unfathomable fortune, which for them is exchanged for political power. Sure, they get the choice real estate, hold the gold, in short, they have the material trappings. But the material tappings are not the point at all. It is all about having to power to be at the center of this game. You find yourself at the center of a game like this, and you can do whatever you want -- and that includes jerking the entire world's population around.

Staying on the business of Treasury debt, even your own link states that there are little fish and big fish that buy US Treasury notes. The biggest fish that 'buys' those notes is the money supply cartel, because that is how most of the primary money comes from. Using your own number of 15%, that is a critical percentage, because the 15% (your number) represents new, primary money coming into circulation. Once the fed get the IOU from the USA, the cartel turns around and 'sells' that note to whoever wants it, typically other foriegn govts, they being the largest purchasers of US treasuries in the secondary market.

But here is where your typical post of half truths comes back on you. When the fed dumps US treasuries into the secondary market, then that creates other levels of money supply. When a 'buyer' of a US treasury in the secondary market get the Note, they get an asset.

Now, getting back to our big fish, little fish. Yes, mom and pop, if they got $1000. can buy from the treasury. And even a large corporation and foriegn govt. can come in and swap their notes (their assets purchased from the central bank). But the exchange of securites (assets; read: money) purchased in the secondary market from the central bank, which got it from the US govt in the first place, is just one big gigantic game of recirculation and regurgitation of the money supply.

The point is, the original source of the money used at a treasury auctiuon is the original transaction between the US Treasury and the central bank in the first place in that (to use your number) 15%. What gets the money supply ball rolling is this transaction. Once that note is shuffled off to the secondary market, it is worked over in numerous ways (vis a vis various derivations and securitizations) which adds even more money to the money supply, 'money' which enables the other 85% (using your number) to buy treasury notes.

It is a cirsular game of BS, and as usual, Nick Danger, whoever you are, you continue to miss the point. The fact is that the US govt is the largest initiating source of borrowing from the central bank. The US govt is the central banks 'best' customer. And as we have recently seen, when the US govt stops borrowing 'money' from the central bank, the money supply weakens, and the asset prices get wobbly.

If the money supply cartel sees its biggest and best customer not borrowing, they know d*** well mom and pop are not going to make up the difference. This in turn means the money supply will begin to shrink as debt is repaid, which means the prices of stuff like stocks and real estate begin to collapse, which means economic havoc for those who thought the system was 'sound'.

So, sure enough, when the US govt was 'giving' money back to the tax payers (you know, tax cuts, remember those?), they were really saying that they did not have a need to borrow from the cartel, no matter what the rate, because the supply of money was far greater that the demand for it. As a result, the asset value of the prized securites in America (stocks and real estate) began to buckle, seriously enough, that by 9/10/01, the market was taking the right course in response to the reality that there was simply too much 'money' and not enough demand for it.

In case you did not know, all debt has a time expirtation. Like I said earlier, when the bill is due to be paid, a good borrower, to keep his credit up, will pay on time. Yet, again, when the debt is paid, that not only extinguishes the face value of the debt, but all of the multiples of securitizations and derivations that went along with it. Thus, when one primary dollar is paid back when a note comes due, that shrinks the money supply by, geez, I cannot imagine! I know the cartel will let their member banks play with that dollar up to 10 times, but that does not include the various derivations and securitizations that you basic Wall Street quant cooks up. So I will be conservative, and say that for every dollar on the face of a note paid back to the bank, that extinguishes at least $20 (it is all fiat, not real dollars).

You can imagine, then, if there is no new money coming into the system, and if our creditworthy borrowers are continuing to repay their loans, the only thing that can happen is for the money supply to break down at a precipitous rate. This is the central (no pun intended) ingredient to a sudden, asset price collapse. Thus, there is a great need to find a way to keep pumping new money into the system, to keep the money supply expanding, otherwise, asset prices collapse, and, well, hey, we get screwed.

In light of a notable lack of demand for new money from the banking cartel, we saw on 9/10, that the reality of that lack of demand, despite all the phony money supply spikes we saw earlier this year, which eventually had to be pulled out of the market because there were no takers for the money, what we saw was that no matter how low the cartel brought their rates, people were not borrowing. The issue has never been the cost of money being too high. The issue is too much supply of money, and not nearly the demand for it. People seem to think that just because the cartel keeps the bait on the hook the fish will eventually start to bite. But if the fish have no appetite for it, they won't.

This is precisely where we were on 9/10. But then the disaster came, and the cartel's best customer, the first step of the process of getting new 'money' into circulation, the US govt, stepped up to the plate and started borrowing from the cartel to the tune of at least $100,000,000,000.00 of new money. The US govt could not just 'borrow' the money because the cartel needed a money supply injection. We were waaaaaaaaaaaayyyyyy past that game. This time, unless there was a serious pretext, a great necessity to justify the 'borrowing' (read: injection of another massive batch of new money, to add to the already staggering sum that the market, when given a breather from manipulation, was saying the supply greatly exceeded the demand), there simply was not going to be an increase in the money supply. That meant only one thing, the precipitous, as I explained earlier, exponential decline in the money supply, which meant stock market and real estate market asset price collapse. This is exactly where we were headed prior to 9/11/01. But the global elite had a little trick up their sleeve, and voila!, a national tragedy, leads to an undeclared war, which leads to a 'demand' for new money, the boyz race down to a low a few ticks north of 1998 lows, and rev up the engines at the US Treasury, with the able assistance of the master manipulator himself, Bob Rubin, and, gee, what a surprise, we get a big, fat 4th Q rally.

Don't worry, Nick, someday you might figure all of this out. I really recommend you avoid being disingenuous, misleading, and the purveyor of half truths. The fact is, the US govt's IOUs are the primary source of what got this money supply snowball going. Anything to suggest otherwise displays a fundamental lack of being able to grasp the details of the entire matter, not just, like you so often do, focusing on a single part.

It is not relevant, nor germaine to this issue that the cartel unloads US Treasuries to the secondary market. What is relevant is that they have the exclusive power to create money, and they have the power to inflate and deflate at will, for whatever purposes they have for themselves, seeing how it is they are a group of private individuals, in business, for something they measure as profit, and their profit is power, the wrong kind of power, the kind of power that can screw millions for the benefit of the few.

Sorry, Nick, once again, you are wrong and missed the point. However, don't feel to bad. You are not alone. It seems that even the folks at the treasury that reply to emails don't have a clue either. The following is an email exchange I just had with one of them:

Here was my email first:

> > > > > > > > > > > "IFT Limited"
> 12/12/01 04:29 AM
> > > To: Admin@bpd.treas.gov, IS-MAB@bpd.treas.gov
cc:
> Subject: Question
> > > By what process does a brand new US federal reserve note come into > existence, one that had never existed before, and was not previously in > circulation?

> > Does the US government borrow money from the federal reserve? When, why, > and > under what terms?

> > TIA > > SM> > > >

And the response from the Treasury official:

----- Original Message -----
From: IS-MAB@bpd.treas.gov
To:
Sent: Wednesday, December 12, 2001 9:08 AM
Subject: Re: Question

> Dear ,
> > Our office maintains TreasuryDirect accounts for investors who hold their > Treasury marketable securities directly with us. We do not maintain the > type of information you inquired about.

> > You might try looking at the web site: http://www.federalreserve.gov/ > > I'm sorry I cannot be of help.

> > Patty M.
> Customer Service Specialist

Basically, what Patty is saying is, she is clueless.

Lastly, I am posting this in case anyone might be tempted to fall for the half truths and disinformation of Nick Danger. He means well, but really doesn't know what he is talking about.

[spoosman]

Yes, that is what I did say a few months ago, and it paid off very well. I bought the lows in September because the price action told me to. As we came off the lows, I smelled the rat again, got flat, and lost interest. It has only been lately that I have been nibbling. The boyz wanted to juice the 4th Q. Markets do not go straight down or straight up. Post 9/11/01 for a bear has become a very tough game because the manipulators really turned up the gas. Most guys didn't even bother to fight it during the 4th Q, which explains the relative ease of the 4th Q rally.

Despite the exception of me buying the spring lows and 9/01 lows, as long as they explode like this and stay in my face, the larger, over-arching reality kicks in, and I go back to being a grumpy bear. I am negative on the market at this stage because I am negative about the suffocating prescence of the manipulators. OK, so maybe the snakes never go away, and we are forced to lie down with them. If that is the case, then I want to be compensated for that reality by holding out for the effect of that reality to come to pass, which is a substantial market break. We had a pretty fat one on Sept, and I bought that, but at the end of the day I became very negative because of the diabolical scheme to prop the beast up.

Fundamentally I am very negative about all of this, but I do respect price action, and the power of the creeps to stay in my face, which is where they are today. If the creeps we shall have with us always insist on hanging around, than I insist that someone else get stuck holding the bag. I am willing to take the risk for not being a buyer until I want to. I'll let someone else worry about 'missing' the big move.

Whether the market goes up or down, however, really has no bearing on the central thesis I continue to press: we have a dishonest fiat system that must be replaced, and as a nation the risk far out weighs the benefit to continue along such a path. If you are not catching that, you are missing the point of every post I make.

[spoosman]

Your recollection and mine do not jibe. In fact, I am certain I did not say that #1) the DOW would be at 6000 by the end of the year and #2) I did not say that after 9/11/01. Hey, if you can find the post, I'll eat it.

However, I did say that i believe the ultimate objective for the market was to break 6K on the DOW. It is not like me to say when I definitely expect something to happen, but I can guess as to when it might happen, subject to such and such a contingency.

However, I do stand by my analysis that the market's true downside objective is 6K. this is a wicked game, and even if we ever get to a break of 6K, it ain't gonna happen overnight! Add to that the radical determination of the manipulators to stoop so low as to engineer and/or capitalize on an event to get the US govt into heavy borrowing mode again, well, hey, it'll be one heluva fight on the way down, considering how much is at stake.

I do want to emphasize that the central thesis behind all of my posts is to say we need to get rid of the thing you say not to fight. BTW, I 'fought' the fed from january - september and did OK. It is not good enough to make the assumption at this stage, that just because the fed is crashing interest rates that that will somehow make productivity happen. If the demand for the money is not there, then the over supply will get eaten alive. That means asset price devaluation.

The powers that be demonstrated on 9/11/01, and in its wake, that they will stoop as low as they have to do do anything to keep their game alive. If it was just a matter of monkey business with money, sure, for the time being, the mantra "don't fight the fed" was palatable in terms of a defensive strategy when dealing with this market.

But to me, what happened on 9/11/01 and after is a clear indication that these people have crossed the line. They sank too low in a desperate bid to keep their game alive. This is my perception of the matter, be it wrong or right, but I do believe the facts support my conclusion, else I would conclude something else. This entire game of fiat monkey business stands on shaky moral ground as it is, but it seemed as long as they stayed confined to their money game, somehow the Greater Power just let it roll on.

However, I say these people have radically crossed that line. In my view, they never had any moral ground to stand upon, but it seems they had enough to survive this long. 9/11/01 tells me whatever illusion of any moral ground the creeps might have claimed has been totally blown away. I do not believe in them, I do not believe in what they are doing, and I thing the sooner our nation is rid of them the better. And if they won't go away, then I have an expectation that the effect of their prescence in the market, and their manipulations will backfire at some point. Somebody will end up holding the bag. When I see a bunch of bag holders all around me, then I start thinking about getting more involved in looking for reasons to be bullish.

It is a tragedy that it will likely have to come to a nation of bag holders before the light will go on in this country. Not much I can do about that.

[Deuce]

Excellent post. One small thing. I think (I could be wrong) that the Fed has not been allowed to buy new US bond issues directly since 1942. Instead, it buys, say, $10bn in the open market, thereby enabling commercial banks to monetize $100bn through the multiplier effect. Also, now that commercial banks have a 0% reserve requirement on time deposits, a commercial bank doesn't hardly even needs the Fed to create new money.

[AmericaUnited]

Your posts only go back to 10/28/01. Jim Rob must have archived older posts.

You did post a self-written article after 9/11, claiming the FED was behind the attack. When the market opened the following week, you stated that if the market closed at the lows for the day and did not rally, you would be looking for DOW 6000 at year end. Absolutely, positively, you posted this.

[Nick Danger]

It's too bad that anyone who decided they would read your note probably jumped off the train about the time you were telling us that the prices of stocks and real estate would collapse in an inflationary economy. Since this is 180-degrees from what actually happens, as verified by virtually everyone's personal experience, a lot of people probably concluded right then that you were penning a hell of a rant, but not one that could be trusted to go anywhere useful. They would have been wrong.

The people who jumped off there missed out on the fact that it soon got even worse. In the very next paragraph, you made the statement that we never own anything, because the "value" (your word) of everything we own is subject to the dictates of the money cartel. That suggests that if I go out and buy a postage stamp, and the money cartel subsequently hoses up money so badly that it takes $300,000 to buy a 34-cent stamp, that my stamp is worthless. No it's not. It's worth $300,000. Watch this: I sell it for $300,000, I walk down to the bank, and I pay off my mortgage. Now I own a house, free and clear. Bought it with a postage stamp. You say I could never own anything because of those guys? Is that your final answer?

I see you like that trick of treating institutions (or at least banks) as if they were human individuals, making fabulous fortunes and stuff. Don't you claim to be a big-shot investment advisor? Aren't you aware that all but the tiniest banks are publicly-held corporations?  How exactly does a "bank" enjoy material trappings? Aren't the "unfathomable" profits owned by the shareholders? Tell us, since you're an investment advisor, how are bank stocks doing these days? Would you recommend bank stocks as a superior investment, since banks make unfathomable profits? How much CITI are you holding in your own portfolio? Do you walk your talk, or is this just a rant you deliver while you put your own money somewhere else? Have you ever owned a bank stock? Why not, if they make such ungodly profits?

You know, I never thought about the fact that the primary source of new money comes from US Treasury 'borrowing' from the cartel. So you're telling me that when Congress votes to spend money they don't have, the Treasury has to go out and borrow the money? And this causes the mean, nasty cartel to make new money? And adding new money in huge chunks causes inflation? Geez, no wonder you blame the cartel for inflation. And all this time I thought it was caused by Congress spending money they don't have. Tell me though... if the Congress hadn't voted a bunch of deficit spending, would the cartel have made the money anyway?

Got another question. You tell us that "Once the fed get the IOU from the USA, the cartel turns around and 'sells' that note to whoever wants it." What exactly do they get in return when they sell it? Money? What do they want with money? I thought you said they could make all the new money they wanted. Now you tell me that they buy the Treasuries with money they made out of thin air, and then turn around and sell them to somebody else,,, for money.  I suspect you're not telling us the whole truth here. I also suspect you don't know an open market operation from a parking lot, which might have a bearing on how much credence we should place in things you say about the Fed.

Just when I thought you couldn't possibly get any worse, you state that "When the fed dumps US treasuries into the secondary market, then that creates other levels of money supply." OK, now I'm past "suspecting" that you don't know an open market operation from a parking lot, now I know you don't. Selling Treasury bills from its holdings is how the Federal Reserve drains reserves from the banking system. That does not "create other levels of money supply." That reduces the money supply. You have this totally backwards.

What's amazing is that you could get anything right. But you did. Personally I cannot imagine how you got there by having everything backwards, but there you are anyway, correctly noting that once the government stopped running deficits, the stock market tanked and we quickly found ourselves in a recession. It is doubly amazing that you got this right because you think it was caused by there being too much money. No... it was caused by there being too little money.

I agree with you that "the original source" of new money (not new wealth, just new money), is the Fed buying Treasury securities in the secondary market. That has the opposite effect from the paragraph above. Buying T-bills adds reserves to the banking system. Soon enough, the banking system will have created new money. And obviously, there would not be any Treasury securities out there to buy unless the Treasury had come around first and borrowed some money. (Let's ignore the chicken-and-egg problem with this, let's just say it all started with ten bucks printed by Benjamin Franklin or something).

Think about what you said there. The Fed cannot buy T-bills in the secondary market unless the Treasury first issues them. The Treasury cannot issue them unless the Congress spends more money than it has, thus requiring borrowing. This suggests two things: (1) it is actually Congress that creates new money, via deficit spending, and (2) should the U.S. government ever run a surplus, the Fed would find it harder and harder to find Treasuries to buy, and soon there would be no more new money coming in. This would appear in a growing economy first as rising interest rates, but as economic growth continued, it would start showing up as deflation. Deflation would quickly cause a flight to cash, a huge drop in investment, interest rates falling to the floor, and a sharp recession with large numbers of layoffs. Sound like any country we know?

You keep flipping back and forth in your narrative between "too much money" and "for the money supply to break down at a precipitous rate." You need to make up your mind which it is, so I'll help you. It's the latter, and it was caused by the Congress (and Clinton with his tax hikes) doing something that everybody thought was a great idea: reducing the deficit and even running a surplus. When you see prices collapsing, it is not because there is too much money, but too little. If there's lots of money running around out there, prices will be bid up. It's when there isn't enough that sellers have to reduce their prices in order to get any of it to come their way.

It's too bad you closed with a speech about those private individuals doing all these manipulations for their own benefit. That's where the hogwash is coming from. These people are paid functionaries; they do not derive personal benefit from any of this. That's just a convenient hook to hang a conspiracy theory from. Trouble is, all these people are employees. If banks make some bizillion dollar windfall, it's bank shareholders who will see it. And that can be anybody with a 401-K. Instead of griping, you could be in on it. But you're not, are you? I'll bet you don't hold any bank stocks at all. Which sorta tells us that you don't really believe this stuff yourself.

Incidentally, on 3/30/01, you offered to trade Cisco shares for GE. If you'd done that, today the Cisco shares would be higher than they were then, and the GE shares would be lower. If you had done the trade and then sold at the highest GE price after 3/30/01, you would have made a 21% gain on the GE. The guy who took your Cisco off your hands would have made a 46% gain had he done the same thing. What do you charge for such advice?

[Deuce]

As usual, Nick, your post contains mostly hot air, some truth, and some inaccurate/misleading comments. I comment briefly on some of the latter category

Would you recommend bank stocks as a superior investment, since banks make unfathomable profits?

The goodness of a company has nothing to do with whether it is a good investment. Think of it this way: I have a Rolls Royce and a Beat up ’72 Chevy for sale, which do you want to buy? You need more info, don’t you?

Secondly, I’ll bet Spoosman would probably agree it would have been more precise to say “undeserved” profits rather than “unfathomable” profits.

Once the [cartel] get the IOU from the USA, the cartel turns around and 'sells' [some of it] to who[m]ever wants it." What exactly do they get in return when they sell it? Money? What do they want with money? I thought you said they could make all the new money they wanted. Now you tell me that they buy the Treasuries with money they made out of thin air, and then turn around and sell them to somebody else, for money. I suspect you're not telling us the whole truth here.

As slightly modified to avoid nitpicking, the above IS the whole truth. What part don’t you understand. (I think I know but I’d rather you put it in writing before I clarifying it for you.)

Deflation would quickly cause a flight to cash, a huge drop in investment, interest rates falling to the floor, and a sharp recession with large numbers of layoffs.

Deflation (caused by a money supply that is not growing while real wealth is increasing) has NO no causal relationship to recession. You are making the same mistake I have seen others make: assume that since recession are accompanied by deflations, the latter has caused the former. Then they make some reference to particular years in history as if it proves their point. The fact is that some deflations are accompanied by recessions and others are purely monetary phenomena. Similarly, some inflations are accompanied by booms and others are purely monetary phenomena. Failure to distinguish leads to faulty conclusions.

If banks make some bizillion dollar windfall, it's bank shareholders who will see it. And that can be anybody with a 401-K. Instead of griping, you could be in on it. But you're not, are you? I'll bet you don't hold any bank stocks at all. Which sorta tells us that you don't really believe this stuff yourself.

Again, I’ll bet Spoosman would define the profits as “undeserved.” They emanate from no particular real contribution to the society, yet they are enormous. For example, the entire financial sector pulls out in the range of $80bn/yr. By comparison, the entire auto industry is about 1/8 the size. Don’t you feel this is a bit much for mere “functionaries” as you call them. BTW, as I’m sure you understand, some of the windfall never gets to the bottom line because some of the higher “functionaries” take rather large salaries, bonuses, and stock options

[Nick Danger]

As usual, Nick, your post contains mostly hot air, some truth, and some inaccurate/misleading comments

And a Happy Holiday to you as well, my friend.

The goodness of a company has nothing to do with whether it is a good investment

The term "goodness" seems to serve the purpose of a red herring in your note.  The term used by spoosman was "unfathomable profits." I interpreted his term as an attempted synonym for "really, really big" profits that defy understanding. But perhaps I was wrong. Perhaps he meant "profits so low that we can't even see far enough down to measure them." But I doubt it.

In any case, the term "goodness" has nothing to do with any reasonable interpretation of "unfathomable."  For me to ask spoosman whether he recommends investing in companies that make "unfathomable profits" is perfectly reasonable. If he does not recommend investing in such companies, it would be reasonable to wonder why.

I'll bet Spoosman would probably agree it would have been more precise to say 'undeserved' profits rather than 'unfathomable' profits.

Spoosman knows how to type. I'm sure he can speak for himself concerning what he meant.

the above IS the whole truth. What part don't you understand

I don't understand why spoosman thinks that the Fed buys Treasury bills directly from the Treasury. That is simply an error of fact. That you would call it part of "the whole truth" is just adding to the overall noise level around here. I wish you guys would get your facts straight. A whole branch of Kook Theory depends on the Treasury selling T-bills to the Fed. But it doesn't do that. It auctions them off to the public. The Fed is never a bidder at those auctions. You guys are basing an argument on something that is not so. It is demonstrably, verifiably false.

Were spoosman's lament to be corrected so as to be in line with reality, his paragraph would have the Fed buying Treasury bills on the open market (that's why they call it the Federal Open Market Committee) and then selling them again to 'whoever wants them.' What satisfying mystery is solved by telling us this? What practical effect could there be in the Fed buying, and then immediately selling, the same thing?

Deflation (caused by a money supply that is not growing while real wealth is increasing) has NO no causal relationship to recession.

I'm glad you pointed that out, because it provides me with an opportunity to demonstrate that you don't know what you're talking about. Let's create a really simple economy in which there are six people, six goats, and six dollars. In this economy, the only things there are to buy are goats, and not surprisingly, goats are priced at one dollar each. Also, the only  job in the economy is herding goats, which coincidentally pays one dollar per goat raised. So the six people have this nice little economy where they buy and sell goats for a dollar each. Goats and dollars are constantly changing hands. Everything is in balance and everybody has a job.

This economy doesn't even look like it needs money at all; these folks could be bartering goats directly for all the difference it would make. In fact they could just be raising their own goats, and not even trading them. But let us suppose that they all live far apart from one another, and it's just too inconvenient to carry goats along on trips to use as barter. So that's why these people invented money, and why they use it.

Now the supply of real wealth increases: two of the goats have baby goats. Now there are eight goats in the economy, but the money supply does not increase to accommodate this. There are only six dollars with which to buy eight goats. There are now "too few dollars chasing too many goods." So deflation happens; in order to clear the market, the price of goats must drop to seventy-five cents each.

Minutes later, there are ten goats, and then twelve. Quickly the price of goats goes from a dollar to fifty cents. Real wealth has increased, but the money supply is not keeping up. The people raising these goats are not happy about this. The people who were holding dollars when this happened are very happy. The guy who sold a goat yesterday for a dollar can now buy two goats for a dollar. But why would he do it? If he waits until tomorrow, the price of goats might be down to 30 cents. So he doesn't buy. Do you hear a recession coming yet? When the people with the goats find out they can't sell them, because all the people with dollars are holding back waiting for prices to drop even more, they stop feeding the goats and they lay off their goat herders. Is it recession yet?

Expand this little economy to one the size of ours, and you would see what I called a "Flight to cash." Everyone with a goat would be out trying to find some sucker to give him a dollar for it quickly, before the sucker finds out what's going on. The seller might even give a discount, just to get rid of the goat quickly and get his assets into cash. In no time at all we have all the people with investment capital (the dollars) sitting on the sidelines, because there's no profit in breeding goats anymore. You no sooner feed them than the price you can sell them for drops even more. Investment and production are a losing deal. Meanwhile the goat-holders are stuck with unsold inventory.

So yes, a money supply that does not grow to keep up with the amount of stuff to buy does cause deflation, and it's intuitively obvious why an environment where prices decline continuously would cause people to hoard cash and wait for prices to decline even more. Which causes the sellers to reduce their prices, and so on. Pretty soon everyone has been laid off, the people with investment capital refuse to invest in making any more "stuff," and what "stuff" there is sits in inventory. When we get to the bottom it's a recession... or worse.

I don't expect you to accept this, I expect you to blow it off. But that's OK. No one else will be fooled.

[The profits of banks] emanate from no particular real contribution to the society

Your claim is not unlike the common belief in the Middle Ages that "merchants" added no value, and that the "merchant class" was therefore ripping everyone off. Facilitating transactions does not look like adding value to some people, but -- let's just cut right to the chase -- that's because they have their heads up their butts by not realizing that people's time is worth something to them.. Any transaction which transpires more quickly, or more easily, or more conveniently, is a lower-cost transaction than the same trade made without the speed or convenience. Lowering cost is a perfectly reasonable way to add value. Borrowing and lending would be much more costly for individuals who had to -- themselves -- find each other, determine each other's trustworthiness to the point of being willing to put serious money at risk, negotiating terms, and hiring lawyers to formalize the deal. True, we could blow this kind of thing off in my economy of six people, but you need all those steps in an economy the size of ours. Banks do all that stuff, and they do it for a fee, and they make profits from those fees. The fact that people willingly pay the fees rather than do it all themselves tells us that the banks do indeed add value. They add the same value that merchants add; they locate stuff to sell (in this case money-to-lend), they offer the stuff at a price (in this case interest), and they relieve both parties of having to hunt for each other. It's basically the same role that grocery companies play in food distribution. The little market where the farmers and the villagers meet each Thursday in the center of the village works pretty well in Afghanistan, but it's a model that does not scale well. That model doesn't scale any better when the item to be distributed is money.

This "bankless society" you guys are peddling is basically a blueprint for a medieval, agricultural economy where wealth is concentrated in a landed gentry, and where there is no upward mobility for anyone else. We can tell that by looking around the world at bankless economies, of which many still exist; or at our own history.

[dennisw]

Thnx for your (always) erudite post(s). I assure you that many just sit back and absorb and know they are not fit to reply. At least not on the same level of knowing.

[Deuce]

Dennis:

5 minutes after Nick's post you concluded it was erudite? I assume in your efforts to seek the truth of the matter you went back and interactively read the original posts to which Nick was responding.I'm impressed. BTW, has anybody ever seen Dennis and Nick together in the same room at the same time. I thought not.

Nick:

As usual you took a post that made 3 major points, decided to dishonestly side step 2 of them (figuring, I guess that your alter egos like dennisw and Rodney King would hardly notice through their adulatory praise) and concentrated on the 1 of the three point that you THINK you are right about. I will respond to the deflation/recession issue in a separate post. For now, I won't let you get away with the two points you tried to sidestep.

1. A company that makes unfathomable profits could be a good or a bad buy depending on the price. For example, Microsoft was a sell over $100; Enron was a buy at 40 cents the other day when you could have doubled your money in a few hours. In other words, whether to buy or sell is determined by the answer to the question: under-valued or over-valued, not by the answer to the question: high profits or low profits.

2. I purposely restated Spoosman's post to avoid nit-picking and you purposely went back to the original to nit-pick rather than address the real issues. Let's be explicit. If, over the last 30 years or so, the Fed engaged in sufficient open market operations to create enough commercial bank reserves to allow those banks to buy $1 trillion of Federal debt that costs you and me approximately $50 billion per yr. (Note:$1 trillion is the amount of bonds held by commercial banks), what exactly is the service you are claiming they provided for that $50 bn?

[Deuce]

Let’s go slowly, here. I have asserted that while recessions are accompanied by deflation, sometimes deflations occur when there is no recession. I feel this definitively makes my point.Is your position that:

A.) my facts are wrong;
B.) my facts are irrelevant;
C.) something other than A or B above and if so what?

regarding your goat example (which, when corrected for your sloppy analysis, will make my point rather than yours): can we add the statement early on that the reason a goat has value is that it produces milk and cheese? Please clarify so that I can proceed past the first few sentences of your example.

[Nick Danger]

1. A company that makes unfathomable profits could be a good or a bad buy depending on the price.

That's true, but the price of bank stocks is known. We can look them up in a hundred places. So when I asked spoosman if he was recommending them, that was not a theoretical question. He would presumably have found out what the prices were so that he could form a recommendation. I think he knows how to look up stock prices; in fact he represents himself to be an expert stock trader. So far he has not answered as to whether he would recommend them. I am sure, however, that as an expert trader, he appreciates your timely advice that he should check the prices first.

I purposely restated Spoosman's post to avoid nit-picking and you purposely went back to the original to nit-pick rather than address the real issues

You do not get to re-state what spoosman said, and then throw knives at my reply which was addressed to what he did say, and not your re-statement. You especially do not get to do that and then claim that by doing so, you have defined "the real issues." So far as I know, nobody died and put you in charge of what the Real Issues are.

[blah blah blah ending in... ] what exactly is the service you are claiming they provided for that $50 bn?

They saved the Treasury Department, and hence the government, and hence the taxpayers, a ton of money in lowered transaction costs, which is exactly what I said they would do. Think about how much it would cost the Treasury, purely in marketing and advertising expense, to sell $1 trillion worth of savings bonds and other toys to individuals and companies. We would have more 'savings bonds' ads on TV than we'd know what to do with. This would not be cheap, and it would still not make the interest go away.

Most likely, the Treasury would end up paying about as much interest as they do now, except that we could tack on another $10 billion or so for marketing expense (Procter & Gamble spends that kind of dough every year to generate around $35bn in revenue... about the same as we're talking about here.)

Finally, for the last time, there is no individual called a "bank" who gets to keep the money. Bank profits end up in the hands of shareholders, who are pretty much the same "us" as the "us" that pays the interest. Quit taking what is a circular path and claiming that it stops right where you want it to, in the hands of some cartoon tycoon called a "bank," who then lives high on the hog with all the ill-gotten gains. You sound like your understanding of economics is derived from Scrooge McDuck comic books. Here's Uncle Scrooge, sitting in his money bin, wallowing in coins and cackling "Bwaa ha ha" as he savors the $50 billion he milked from the taxpayers. It was a comic book Deuce. It's not real.

[Nick Danger]

can we add the statement early on that the reason a goat has value is that it produces milk and cheese?

I didn't specify a reason they had value. Perhaps people considered them nice pets, or found them useful as a sort of natural trash compactor. Let's not get too carried away with the fact that the things in the example were goats. They could just as easily have been cute little bunny rabbits.

Besides, there's no reason to generate added complexity by turning the goats into capital goods (milk and cheese factories). The female goats are already capital goods in that they produce more goats. You're just proposing to add a second and third product they make. That will add complexity without fundamentally changing the example.

[Deuce]

Nick:Would you recommend bank stocks as a superior investment, since banks make unfathomable profits? Why not, if they make such ungodly profits?

Duece: A company that makes unfathomable profits could be a good or a bad buy depending on the price.

Nick: That's true.Blah, blah,blah.

You begin by implying Spoosman was contradicting himself. I point out the simple fallacy in your allegation and several posts later you finally acknowledge it but in your typical, intellectually dishonest subterfuge (Blah, blah, blah) try to redefine the issue to some ridiculous non issue like whether or not Spoosman can look up the stock price.

Duece: what exactly is the service you are claiming they provided for that $50 bn?

Nick: They saved the Treasury Department, and hence the government, and hence the taxpayers, a ton of money in lowered transaction costs, which is exactly what I said they would do.

You are so unbelievably clueless on this one. Let me try to boil it down for you, into a simple question. Which of the following would you prefer:

1. Treasury issues $1 trillion of non-interest bearing treasury certificates (i.e. money) on top of which NO fractional reserve money creation can occurs. (interest cost to Nick and Duece = $0)

2. Fed increases reserves of banks by $1 trillion so they can buy bonds. (interest cost to Nick and Duece = $50bn/yr)

Nick:There is no individual called a "bank" who gets to keep the money. Bank profits end up in the hands of shareholders, who are pretty much the same "us" as the "us" that pays the interest.

You repeat this over and over as if there is some meaning in it to you, and yet it is totally inane. Is it your position that anything is OK as long as the entity that does it is a publicly traded company?

[Deuce]

Duece: can we add the statement early on that the reason a goat has value is that it produces milk and cheese?

Nick: I didn't specify a reason they had value.

The problem is that, in effect, you have implied why they have value. Your implication is that the only value they have is that they can be sold for dollars. Your stupid analogy breaks down without that assumption.

My initial comment was to point out to you that you were wrong to conclude that deflation causes recessions or depressions. So let me repeat:

I have asserted that while recessions are accompanied by deflation, sometimes deflations occur when there is no recession. I feel this definitively makes my point.Is your position that:

A.) my facts are wrong;
B.) my facts are irrelevant;
C.) something other than A or B above and if so what?

[Nick Danger]

My initial comment was to point out to you that you were wrong to conclude that deflation causes recessions or depressions.

Oh, stop it. It is intuitively obvious why a period of declining prices is going to cause people to stop investing. Who would spend $3 million to put up a factory that would have a market value of $2 million the day it was finished? Why not let the other poor schmuck spend his three million, then buy it from him for two million? Problem is, the other guy sees that too, so nobody puts up the factory.

Here's a graph that shows us when the periods of deflation were (Annual CPI change < zero):

We haven't had an honest-to-goodness period of deflation since 1948, but we've had plenty of recessions. Your statement that "recessions are accompanied by deflation" is just plain false. In fact, we have seen instances where recessions were accompanied by inflation. President Peanut brought us that. I'll leave it to you to find the deflation that didn't come with a free recession (or worse). Take a look at that really good deflation that started around 1926. What happened after that?