Posted on 11/23/2014 6:55:14 PM PST by Tolerance Sucks Rocks
(Reuters) - European Central Bank President Mario Draghi has moved closer to launching sovereign debt purchases and data this week will show just how dangerously low inflation has fallen in the $13 trillion euro zone economy.
A sickly Europe has held back global economic growth for years, and now it is contributing significantly to powerful forces already dragging down inflation across the globe.
A spectacular drop in crude oil prices over the past month will be the center of discussion when ministers from the world's top oil exporters meets in Vienna on Friday.
(Excerpt) Read more at reuters.com ...
Try telling that nonsense to a bond trader. Which you quite evidently are not.
“The country is insolvent”
So you’re like the Red Queen and just give words any meaning that you want? Not real conducive to making sense. Apparently “insolvent” means something entirely different to you than to, say, an accountant.
The debt to GDP ratio is the same today as it was in 1949. On the high side but the Treasury never missed an interest payment on its debt then and judging from the price of Treasuries it’s not going to default now either. In fact the Treasury has never missed an interest payment ever, since its founding in 1789.
” The debt will never be repaid.”
And no one thinks it should because it’s a “funded public debt” as designed by Alexander Hamilton. Old Alex knew a few things about finance that have escaped your notice. The important number is the percentage of GDP and/or tax receipts required to cover the interest payments on the debt. And those aren’t remotely near your “the system will collapse” fantasy, despite Obama’s best efforts to put us there.
“Where he’s wrong is in his analysis of the benefits of a Fed. It is an incumbency protection racket. It works to protect banks from the free market effects of their bad moves and it protects them from a nefarious government which manipulates markets to benefit political cronies.”
More nonsense, of which you do have an impressive storehouse.
In the late 1800s/early 1900s JP Morgan used to act as America’s “central bank”, the lender of last resort to other banks. He wasn’t doing this out of his benevolence, he did it to prevent the banking system and the whole economy from cratering. A major collapse would damage his bank as well despite it being the largest in the country by a wide margin.
During bank runs otherwise perfectly solvent banks could be wiped out because they could not quickly convert their assets into the cash demanded by their panicked depositors. They needed a ‘banker’s bank’ to give them temporary loans so that they weren’t wiped out by a short term crisis.
A bank experiencing a run had to fire-sale its assets to get liquid, which had the effect of gutting the value of similar assets held by other banks. It set in motion a vicious, systemic spiral. Morgan had been lending money to other banks when he could in order to halt panics.
As America industrialized the monetary economy became a much larger factor than during the previous agrarian era. Morgan realized that no one bank was going to be able to continue to fulfill the role that he had been playing so after the Panic of 1907 he organized a national monetary commission, which has been a goldmine for conspiracy nuts ever since. Jekyll Island all that other stuff.
The monetary commission would recommend legislation that would give a legal basis to what Clearinghouse Associations had already been doing during panics to keep banks from being wrecked in a bank run. Clearinghouses had been issuing a sort of script in lieu of money when there was a sudden extreme demand for currency. This technically was counterfeiting, but since the script would extinguish when the run was over it was a gray area. Instead of dubious Clearinghouse script the Fed could extend credit to banks based on the Real Bills Doctrine or against Treasuries offered for loan.
Anyway this is/was the rationale for creating the Fed. It’s not the “incumbency protection racket” of some people’s vivid if ill-informed imagination. It replicated behavior that private banks were already doing, but it provided a structured legal basis and some government oversight- as originally constructed the Federal Reserve Board had two Treasury Dept members, although it has had none for many years.
There are legitimate criticisms to be made of the Fed but someone making the claim that everything worked just fine before the Fed is simply very ignorant of American monetary and banking history. Spending some time with Friedman and Schwartz’s ‘A Monetary History of the United States’, James Grants’ ‘Money of the Mind’, Chernow’s ‘House of Morgan’ could begin to dispel the cloud of darkness.
Really got your bacon. You missed my entire point. Why are you so hell-bent to badger me concerning numerous points I never addressed? Relax.....
And improving education was the rationale for the Dept. of Education, and preventing hunger was the rationale for creating Foodstamps, promoting home-ownership was the rationale for the CRA, Fannie and Freddie, and protecting Americans was the rationale for porno-scans at the airport and creation of DHS. What's your point exactly?
They are all just massive, failed, hugely corrupted institutions of the Progressive desire to herd the population, while insiders loot money through the back-door. And the FED is the first among all, because you can't run a Progressive-state without a fiat currency and politicized interest rates.
I just copied 1010RD’s list and you happen to be on it.
“And the FED is the first among all, because you can’t run a Progressive-state without a fiat currency and politicized interest rates.”
Good try. Too bad for that fiat currency theory that we operated on the gold standard until 1933 and on an international gold exchange standard until 1971.
We did have fiat money though. The entire US Note currency issue that began as Lincoln’s Greenbacks and carried through until 1963. Of course they preceded the Fed by nearly 50 years. And there is what was known as ‘bank money’, credit created by banks using fractional reserves but that sort of fiat money has existed as long as banks have been around.
Interest rates were limited by the gold standard until the end of Breton Woods in 1971. It became much easier to politicize them afterwards. It was Nixon and other politicians who made that change nearly 60 years after the creation of the Fed so it has nothing at all to do with why the Fed was organized.
“What’s your point exactly? “
It was in my previous post. The Fed legislation codified what JP Morgan and clearinghouse associations already were doing particularly during panics.
“Try telling that nonsense to a bond trader. Which you quite evidently are not”
Spent my career trading.
“The debt to GDP ratio is the same today as it was in 1949. On the high side but the Treasury never missed an interest payment on its debt then and judging from the price of Treasuries it’s not going to default now either. In fact the Treasury has never missed an interest payment ever, since its founding in 1789.”
No problem with missing a payment to the fed - they’ll cover you
A trader should know that the Fed can set short rates wherever it wants but the market sets long ones. Bond vigilantes will demand an inflation premium and push long rates above the rate of inflation. This happened in dramatic fashion during the Carter years and less so under Clinton.
You are wrong on two points
Bretton Woods established a gold-exchange standard, not a gold standard. They are quite different. In the former, exchanges rates were fixed to the dollar, and only the dollar was fixed to gold. This gold-exchange standard relied on the probity and discipline of US politicians to maintain the exchange standard. Of course, that is why it failed after 25 years. Now the Fed can print as much as it needs to keep the US Government’s social-engineering schemes running
Your second error is regarding the currency after the Civil War. Unbacked Civil War greenbacks were removed from circulation in the 1870’s. National Bank Notes, which you seem to refer to, were issued by “national banks” and were backed by US Treasury debt - which itself specified payment in GOLD.
Moreover, your presumption that the FED is simply doing what JP Morgan did is absolutely false also. A FED that offers credit during bank runs is one thing - a FED that as a matter of daily operations that monetizes massive US Government debt, or over the course of years manipulates the yield curve (operation twist) or operates QE for 5+ years is something COMPLETELY different.
Disagree with your premise and your conclusion.
This trader knows that what you described is true of an actual market.
What we have now is a manipulated system, where the Congress spends a trillion more than it takes in every year. It creates bonds - not at market rates - but at low crony rates that no other investor is willing to pay. If they were, the Fed would not be forced into buying the paper.
In a real market, this would be true. In a real market, prices are entered into freely, by independent sides of the transaction, each acting in their own perceived best interest. We no longer have this.
Once the government and the Fed colluded to drive interest rates down and keep the government floating, using quantitative easing, they eliminated any standard of a risk free rate of return. If there is no certainty of the risk free rate of return, everything else is imaginary. the entire system is now skewed.
This is where we are. In fact, the actions of the Fed have driven both short and long interest rates downward.
The Fed has also acted to drive interest rates to nothing in the banking system. They have effectively stolen hundreds of billions of dollars from retirees.
Currently, the Federal government borrows 46 cents for every dollar it spends. Borrowing continues to grow. The budget continues to grow. It will continue until the amount of the national budget dedicated to paying interest on the national debt is no longer sustainable. We are being squeezed between mandatory spending and interest repayment. Eventually, there will be no discretionary spending and no one to buy the debt. When? Who knows how long you can control the game when you control the creation of money and the laws to extract taxes at every level. History is against the bet that it can happen forever.
http://www.heritage.org/~/media/875FE6DD75DE4574ADD023441989C5A8.ashx - for a picture
best.
The effect of QE is definitely a new factor that the bond vigilantes didn’t have to deal with before. At some point that game has to end.
“Borrowing continues to grow. The budget continues to grow. It will continue until the amount of the national budget dedicated to paying interest on the national debt is no longer sustainable. We are being squeezed between mandatory spending and interest repayment.”
The interest paid on the debt is a bit misleading because the Fed holds around half of it and those interest payments stay with the Treasury.
Congress is the real source of the trouble here since they’re the ones who increase the national debt. Maybe a return to a gold standard is needed to handcuff Congress’ ability to keep increasing the debt. They require some outside force to discipline them.
“You are wrong on two points”
“Bretton Woods established a gold-exchange standard, not a gold standard. They are quite different. “
Strike one. I know the difference and said that we were on a gold standard until 1933 and a gold exchange standard until 1971. It’s my second sentence. You should read more closely before you try to ‘educate’ me. And Bretton Woods eventually failed but not for the reason you’re claiming, the dollar was caught in the Triffin Dilemma because of its role as world reserve currency. Look it up.
https://en.wikipedia.org/wiki/Triffin_dilemma
“Your second error is regarding the currency after the Civil War. Unbacked Civil War greenbacks were removed from circulation in the 1870’s. “
Strike two for you. Every paper money hobbyist knows what you don’t, that the US Notes issue, aka Legal Tender Notes, ran from 1862 all the way until 1971. They were the longest running US paper money issue. They began as the Lincoln greenbacks and were accounted for and issued by the BPE as a separate currency series right up to 1971. Anyone with a red seal $2 or $5 has one and in fact they are still legal currency.
https://en.wikipedia.org/wiki/United_States_Note#Series_1928_United_States_Notes
Good thing you didn’t claim that I made three errors or you likely would have struck out.
“A spectacular drop in crude oil prices over the past month will be the center of discussion when ministers from the world’s top oil exporters meets in Vienna on Friday.”
See my previous posts on this for the real reason for the frantic attempted registrations of 5 million+, by the Exempt Gang Members.
“The great danger the world faces now is deflation”
The Exempt Gang 2009 frantic theft rush of Extortion-Care and the Extortion-Care Lobby is failing and making things worse (velosity of $ fall), the reason for their next frantic attempt at the 5+ million over the border. Zero borders means universal registration IDs taxing.
Pelham, ignoring the ad hominems, is again partly right. We do need a dynamic and effective credit market to support a growing economy, particularly one that is large and diverse.
Given what we know about human nature - emotional decision making, short-sightedness and naturally self-interested - America’s economic history proves we will at some point in time need a lender of last resort (LOLR). Prudence gives way to exuberance and your lovely tulip bulb really isn’t worth a king’s ransom.
Mackay’s book is a great read: http://www.amazon.com/Extraordinary-Popular-Delusions-Madness-Crowds/dp/1463740514/ref=sr_1_1?s=books&ie=UTF8&qid=1417006199&sr=1-1&keywords=extraordinary+popular+delusions+and+the+madness+of+crowds
Thematically, we as conservatives prefer a market based response because, as previously noted, men are not angels. The political model depends on a disinterested, apolitical, iron-willed, neutral party to do the right thing. What we have now in our Fed is the political model of a LOLR. Are there alternatives?
First, what is the goal or the model we want? Well before the creation of the Fed it was known what constraints a LOLR should operate under. 19th century ‘economists’ Henry Thornton and Walter Bagehot developed the well-proved classical theory of LOLR. It’s been supported strongly by modern research. The Bank of England followed the classical theory strictly and very effectively keeping the British Pound a solid and stable currency during the 19th century.
Here’s the main points of classical theory:
1) protect the money stock instead of saving individual institutions;
2) rescue solvent institutions only;
3) let insolvent institutions default;
4) charge penalty rates;
5) require good collateral;
6) pre-announce these conditions before a crisis so that the market knows exactly what to expect.
Found here: http://en.wikipedia.org/wiki/Lender_of_last_resort#Summary_of_the_classical_theory
Read the whole thing for a more complete background: http://en.wikipedia.org/wiki/Lender_of_last_resort
We want the above six points to be followed and obviously they’re not being followed. Moral hazard is rampant and it’s transferring further harm to the system. Is there a free-market response? I say, take a second look at a system of bank clearing houses with the above as a codified legal format in which they operate.
We know that the Congress via our Constitution coins money. Is the Fed the best way to do that or is there a better system?
“The interest paid on the debt is a bit misleading because the Fed holds around half of it and those interest payments stay with the Treasury.”
I think I would evaluate it this way...
Congress wantonly overspends with no restraint
The Federal Reserve steps in to fund the overspending by counterfeiting currency in their computer
The Fed uses this steadily devalued and worthless money to buy the bonds at a crony governmentism, below market rate.
I think that when the day comes that the US gov. can no longer pay it’s debt - even to the Fed - there will be a vast, global reset that takes us off the world stage as anything but a bit player and will cause massive domestic mayhem.
“Congress is the real source of the trouble here since they’re the ones who increase the national debt.”
We agree. I would rephrase it to ... government is the real root of trouble here. I think we agree on that one!
There is much I agree with in your post.
I will only respond to this specifically...
“America’s economic history proves we will at some point in time need a lender of last resort (LOLR). “
Our lender of last resort has done almost all it can. In the next crisis, they will not have the firepower to save us.
The last remaining lender of last resort is the IMF. It will try to save the world economies going under, but will fail.
Many Asian nations will fare much better.
Prepare while you can. Do what makes sense no matter what. Do what you can to be OK. Do it now.
I really enjoyed reading your post. Thanks.
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