U.S. Monetary Policy: Has Anything Changed? 17 comments
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One of the most important lessons that can be learned from probability theory is that the shorter the time horizon one assumes, the more the world appears to be random, even if the odds of a particular outcome are quite high over a longer period of time. This is the reason given for focusing on a process of decision making that derives from a tested model or schema rather than short run outcomes. It is why we need to focus on the underlying situation rather than current headlines that we read daily in the newspaper or hear on the TV monitors.
Currently we are reading about the stabilization of the value of the U. S. dollar, but it depends upon the currency we are talking about. We are hearing that the economy is in a recession - or it is not in a recession. We listen to the speeches and testimony of the Governors of the Federal Reserve System and the Presidents of Federal Reserve district banks and they don’t give us a consistent picture of the economy or of the future of monetary policy. The Secretary of the Treasury puts out frequent optimistic comments, but no action occurs. Furthermore, are commodity prices near their peak, or not? What about inflation? What measures of inflation really provide us with the future direction of prices? The CPI? Housing prices? Oil prices? And, so on, and so on.
All of the above issues relate to short term outcomes. They emphasize what has happened and not what forces are in play that will produce future results. These outcomes distract us from concentrating on the fundamentals of the situation and whether or not anything has changed in these fundamentals.
For example, is there any evidence coming from the current administration that would lead us to think that their economic policies have changed or are going to change? This is an administration that will be out-of-work in eight months, or less. Their options are limited, and they have little or no creditability within the world financial community. All they can do now is to try and talk a good story.
Even in terms of monetary policy, the administration has little room to maneuver. The Federal Reserve responded earlier this year and resolved the liquidity crisis. Financial institutions now seem to be working through the solvency crisis in a relatively orderly way and we can hope that this crisis will continue to lessen in future months.
However, no one really knows what damage has been created on the other side of the equation. The Federal Reserve has produced all sorts of innovations in response to the liquidity and solvency problems and no one has any real idea of how all of this will work out. We are told that the auction facility will go away once things return to normal. Will this really happen and will the Fed return to the traditional form of monetary policy, open market operations in U. S. government securities? What will happen to all of the debt the Fed has taken on in exchange for government securities?
How much excess liquidity has the Fed created as a result of all of this activity? Will this liquidity result in more inflation? For example, the broad measure of the money stock has shown some accelerated growth in recent months. Participants in world financial markets continue to be concerned about the Fed monetizing a larger proportion of the government debt that has been created in the past six years.
What has changed? Now that the liquidity crisis has been resolved and the solvency crisis seems to be working itself out, will the Fed begin to raise interest rates to strengthen the dollar? Has the situation altered so much that in the waning days of an administration that already carries with it the legacy of a major financial disruption and possible economic collapse, that the Federal Reserve will start raising interest rates to combat inflation and fight the decline in the value of the dollar? Might the Federal Reserve really reverse itself in the near future?
And what about the basic economic fundamentals? Financial institutions may be working through their balance sheet problems and housing prices and construction may be nearing a trough, but now there are other organizations and industries that must restructure as a result of the change in the economic climate. The auto industry, the retail trades, and others, have only begun their adjustments. How will this round of restructurings change the whole picture?
And what about the events that are taking place in the rest of the world? What about the price of food? What about the price of oil? What about other central banks holding interest rates constant or even raising them to fight their inflation battles?
The obvious point of this discussion is that we may be experiencing some stabilization in some markets, for the present time, but the basic fundamentals have not changed. After a market run, one way or the other, markets may take a breather and consolidate for a while, waiting for new information which points to whether or not the markets should rise or fall. In this short run, however, much of the new information will appear to be random. That is why the following question must be asked: has anything fundamentally changed?
In my mind, the players and their messages have not changed. Nothing much is going to change on this front for a while. Therefore, we are pretty much in the same place we have been. Some short run difficulties have been avoided, but this does not resolve the longer run issues. Dislocations exist within the economy and we will not get back to a more stable and productive environment until these dislocations are resolved.
We are not out-of-the-woods yet, and there still may be some further shocks. In this respect, I see no reason to become more optimistic about a return to a stable and growing economy in the intermediate term.
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This article has 17 comments:
There is little room for maneuver and I do not see any reason why we should be more optimistic either. I have also noticed a trend on the markets reports. The more resilient banks have put forth opnions that are more true to the current state of affairs. The banks that have suffered the most losses have been putting out reports claiming that the worst has passed. The agendas here are completely blatant.
I have recently read an article on CFA Magazine - link below - that talks about leadership and the relationship between behavioral traits and financial performance.
www.cfapubs.org/doi/pd...
If you could shed your perspective on the matter on one your blog posts - especially in relations to how a leadership crisis played in the current economic mayhem.
Otherwise, yep, we're in for a moderate, but sustained recession that will primarily be the problem of the next Administration and Congress.
amn political bullcrap, I am sick of it here in the states. We'll get better economically when pain forces the society to change and then the saying necessity is the mother of all invention comes back to us as a nation. No wonder guys like Buffet are investing overseas for the next five years. He has amazing common sense that gentleman.
this is a the riskiest economic environment i have seen in my 30 years of market observation and the market is just 10% off its peak. i suspect those carnival barker pundits who have called "the bottom" on CNBC are in for a rude surprise.
The problem as I see it has not changed, regardless of a variety of economic conditions in the last 75 years, to be exact. The problem has continued unabated, regardless of short term fixing attempts, since President Roosevelt eliminated the gold standard. Before you double over in laughter, consider that from date of the nation's inception in 1776 until 1933, the date that President Roosevelt delinked the dollar from gold, there was no inflation. (If you don't believe these words, I urge you to pull up from Google any inflation adjuster and test my hypothesis. You will find what I say to be a fact.) Until 1933, a politician was constrained by the people from inflating the currency. For if the word got out that too much money was being created by politicians, citizens could simply walk to the Treasury and demand their gold for their dollars. And it worked. In 1776, an ounce of gold bought a man's good suit of clothes. Today, it still does. Here is the way it worked when the country was on the gold standard. If the President wanted to give, say, to Peter, he first needed to take it away from Paul. So no politician could easily buy his way into power by giving to both. That was before the fateful year of 1933. Since then, politicians had no such restraints. they pepper everyone with gifts in the form of the Ponzi Scheme of Social Security, Medicaid, Medicare, etc., knowing that there would be no near-term repercussions. Little did they know what monstrous inflation will envelop us and culminate in a financial Armageddon. And it is almost upon us now. (Note that FDR bought gold for dollars at $20.43 an ounce. When he was satisfied that he had essentially all of American's citizens' gold, he unilaterally raised the price to $35 an ounce. Some nice guy!) As a matter of fact, FDR was the very first earmarker. Shortly after decoupling the dollar from gold, he went on a long train ride with Henry Ickes, the Treasury Secretary, father of the current Henry Ickes, Clinton confidante. What was the purpose of the trip? Answer: to win votes. Until that time, no Federal tax money was used for infrastructure such as building of bridges, roads, etc. FDR changed all that. Until then, it had all been done by local and state authorities. He went with his now-unconstrained checkbook to localities, dispensing taxpayer money for bridge building, et. al in return for promises of votes. It worked. Historians and common people alike know that he successfully ran and won the Presidency four times. FDR saw to it that he could pay BOTH Peter and Paul once he could indiscriminately create money without the restraint of gold. And this country's flirtation with an unbacked currency began. Sadly, no nation on the face of the earth has decoupled its money from the restraints of gold and survived. The United States will be no exception.
And we pay the price today, in spades. Recall that the price of gold in 1933, which of course remains a proxy for general prices of the time, was $20 an ounce. Today, the price is $933 for that same ounce. I'm good at math, being a multi-degreed engineer. That is a price increase of over 40 times. (I believe that the layman can do the same calculation...)
In 1900, the entire Federal budget was $550,000,000. In words, that is over one-half billion dollars. Compare that to President Bush's projected 2009 budget figure: $3,107,000,000,000, or in words, three trillion, three hundred seven billion dollars. Dividing these amounts, 2009's budget is nearly 5,700 times larger than it was in 1900. Scrubbing this ratio by inflation over that same time period, the current Federal budget is 140 times larger than it was in 1900. And we wonder if the nose of the Federal government is under our own tent? Don't wonder. It is.
What about the National Debt? You may say, "Who cares about the National debt?" I say, "You should care," because you are paying interest on it with your Federal income tax payment each April 15th. Not one person in one hundred is aware of what I am about to write...
Early in President Reagan's first Administration, the National Debt crossed $1 trillion. A scant 25 years later, it crossed $9 trillion. It is now increasing at the rate of $1 trillion every 15 months! Since the slope of the gain curve is positive, that means that the National Debt is accelerating over time. In the next 25 years, the nation's National Debt promises to be even larger than $81 trillion. Attendant increases in the annual carrying cost measured by interest on this debt are reflected in rising Federal income taxes borne by every taxpayer.
The only way for the nation's citizens to be able to service the interest in the National Debt, along with rising payouts for Social Security, Medicare, Medicaid, etc., is for inflation to be the norm.
And inflation is baked into the cake, as they say. It has been there already for a long, long time. And it will remain. That is, if Fedhead Bernanke has anything to say about it.
What to do? Simple: buy gold at pace, and have a foreign bank account that you fund as best as you can.
Thank you for your time.
i don't take issue with your fundamental points...all are good.
the problem, however, is solveable if we can garner the national will to solve it. the foreign bank accounts you suggest, i would imagine, include those countries (switzerland...singapo... to name two) who manage their fiscal/monetary affairs properly. such countries do exist and they are not on the gold standard either.
(2) “These measures should help the banking sector attract liquid funds in competition with non-bank institutions and direct market investments by businesses”
Since professional economists don't know the difference between a financial intermediary and a commercial bank this country should prepare for armageddon. I.e., they think commercial banks loan out the savings held within their banks. That's why the Reserve Authorites have virtually eliminated reserve requirements. That's why they think commercial banks should be paid interest on their legal reserves (IBDDs & Clearing Balances). That's why commercial banks pay interest on their deposits (eliminating Reg Q), or hold time depoists. Bernanke is an exceptionally bright scholar. But he doesn't understand money & central banking.
The only time a commercial bank is a financial intermediary is when 100% reserve ratios are applied to all of its deposit liabilities.
Any account-holder, or institution, whose payments (liabilities) can be transferred/transmitte... on demand, without notice, without income penalty, or without equivocation, by data network clearing (under the NACHA rules, Regulation E, Check Clearing for the 21st Century Act, & the Expedited Funds Availability Act – reduce hold periods),
o debit-card,
o credit-card,
o ACH network…automated clearing house,
o EFTs…electronic funds transfer,
o Fedwire transfer system,
o check21 clearing,
o micro-line payments,
or similar methods & types of negotiable credit instruments/drafts/deb... and whose deposits are regarded by the public as money, can create new money, provided that the institution is not encountering a negative cash flow or balance of payments (Rivlin Committee payment study to assess Fed’s role ).
From a systems viewpoint, member commercial banks as contrasted to financial intermediaries: never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits (TRs), or time deposits (TDs) or the owner’s equity or any liability item.
When CBs grant loans to, or purchase securities from, the non-bank public (which includes every institution, the U.S. Treasury, the U.S. Government, State, and other Governmental Jurisdictions) and every person, except the member commercial and the Reserve Banks), they acquire title to earning assets, by initially, the creation of an equal volume of new money- (TRs) or (loans-deposits).
The lending capacity of the member CBs of the Federal Reserve System is limited by the volume of free-gratis legal reserves put at their disposal by the Federal Reserve Banks in conjunction with the reserve ratios applicable to their deposit liabilities (transaction accounts), as fixed by the Board of Governors of the Federal Reserve System.
Since 1942, money creation is a system process. No bank, or minority group of banks (from an asset-holding standpoint), can expand credit (create money), significantly faster than the majority banks expand.
From the standpoint of the individual commercial banker, his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, and probably its free-gratis legal reserves – and thereby it’s lending capacity. But all such inflows involve a decrease in the lending capacity of other commercial banks (outflow of cash and due from bank items), unless the inflow results from a return flow of currency held by the non-bank public, or is a consequence of an expansion of Reserve Bank credit. Hence, all CB liabilities are derivative.
That is, CB time/savings deposits, unlike savings accounts in the “thrifts”, bear a direct, one-to-one, unvarying relationship, to transactions accounts. As TDs grow, TRs shrink pari passu, and vice versa. The fact that currency may supply an intermediary step (i.e., TRs to currency to TDs, and vice versa) does not invalidate the above statement.
Monetary savings are never transferred to the intermediaries; rather monetary savings are always transferred THROUGH the intermediaries. Indeed, as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that savings can be “attracted” from the intermediaries, for the funds never leave the commercial banking system.
Consequently, the effect of allowing CBs to “compete” with S&Ls, MSBs, CUs, MMFs, IBs and other intermediaries (non-banks) has been, and will be, to reduce the size of the intermediaries (as deregulation did in the 80’s) – reduce the supply of loan-funds (available savings), increase the proportion, and the total costs of CB TDs.
Contrary to the DIDMCA underpinnings, member commercial bank disintermediation is not, and has not been, predicted on interest rate ceilings. Disintermediation for the CBs can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction, as a consequence of currency withdrawals. The last period of disintermediation for the CBs occurred during the Great Depression, which had its most force in March 1933. Ever since 1933, the Federal Reserve has had the capacity to take unified action, through its "open market power", to prevent any outflow of currency from the banking system.
However, disintermediation for financial intermediaries-S&L... MSBs, CUs, (non-banks), etc., is predicated on their loan inventory (and thus can be induced by the rates paid by the commercial banks); earning assets with historically lower fixed rate and longer term structures. In other words, competition among commercial banks for TDs has: 1) increased the costs and diminished the profits of commercial banks; 2) induced disintermediation among the "thrifts" with devastating effects on housing and other areas of the economy; and 3) forced individual bankers to pay higher and higher rates to acquire, or hold, funds.
Savers (contrary to the premise underlying the DIDMCA in which CBs are assumed to be intermediaries and in competition with thrifts) never transfer their savings out of the banking system (unless they are hoarding currency). This applies to all investments made directly or indirectly through intermediaries. Shifts from TDs to TRs within the CBs and the transfer of the ownership of these TRs to the thrifts involves a shift in the form of bank liabilities (from TD to TR) and a shift in the ownership of (existing) TRs (from savers to thrifts, et al). The utilization of these TRs by the thrifts has no effect on the volume of TRs held by the CBs or the volume of their earnings assets.
In the context of their lending operations it is only possible to reduce bank assets and TRs by retiring bank-held loans, e.g., the only way to reduce the volume of demand deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.
The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can make loans (if monetary policy permits and the opportunity is present) which amount to server times the initial excess reserves held.
Financial intermediaries (non-banks) lend existing money which has been saved, and all of these savings originate OUTSIDE of the intermediaries; whereas the CBs lend no existing deposits or savings; they always, as noted, create new money in the lending process. Saved TRs that are transferred to the S&Ls, etc., are not transferred out of the CBs; only their ownership is transferred. The reverse process, which is called “disintermediation”, (an economists word for going broke), has the opposite effect: the intermediaries shrink in size, but the size of the CBs remains the same.
Professional economists have no excuse for misinterpreting the savings investment process. They are paid to understand and interpret what is happening in the whole economy at any one time. For the commercial banking system, this requires constructing a balance sheet for the System, an income and expense statement for the System, and a simultaneous analysis of the flow of funds in the entire economy.
From a System standpoint, time deposits represent savings which have a velocity of zero. As long as savings are held in the commercial banking system, they are lost to investment. The savings held in the commercial banks, whether in the form of time or demand deposits, can only be spent by their owners; they are not, and cannot, be spent by the banks. It is an in-controvertiable fact; Dr. Leland James Pritchard (MS, statistics - Syracuse, Ph.D, Economics - Chicago, 1933) predicted stagflation.
From a system standpoint, TDs constitute an alteration of bank liabilities, their growth does not per se add to the “footings” of the consolidated balance sheet for the system. They obviously therefore are not a source of loan-funds for the banking system as a whole, and indeed their growth has no effect on the size or gross earnings of the banking system, except as their growth affects are transmitted through monetary policy.
Lending by intermediaries is not accompanied by an increase in the volume, but is associated with an increase in the velocity of money. Here investment equals savings (and velocity is evidence of the investment process), where in the case of the CB credit, investment does not equal savings but is associated with an enlargement and turnover of new money.
The difference is the volume of savings held in the commercial banking system is idle, and lost to investment as long as it is held within the commercial banking system. Such a cessation of the circuit income and transactions velocity of funds, funds which constitute a prior cost of production, cannot but have recessionary effects in our highly interdependent pecuniary economy. Thus, the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on GDP and the level of employment (over time, structural changes have reduced the validity of this last conclusion). Under existing institutional arrangements, an increase in time deposits results in an offsetting increase in transactions velocity - therefore no dampening effect results. If there is to be a growth in time deposits there should be an offsetting increase in velocity...
What should be done? The member commercial banks (but not the non-banks) should get out of the savings business (REG Q in reverse). What would this do? The member commercial banks would be more profitable - if that is desirable. Why? Because the source of all time deposits within the commercial banking system, is demand/transaction deposits - directly or indirectly through currency or their undivided profits accounts. Money flowing "to" the intermediaries (non-banks) actually never leaves the com. banking system as anybody who has applied double-entry bookkeeping on a national scale should know. The growth of the intermediaries/non-ban... cannot be at the expense of the com. banks. And why should the banks pay for something they already have? I.e., interest on time deposits.
It began with the General Theory, John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”
In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make the statement correct. Perhaps this is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, Reg Q, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, etc.
honest banking? Since the current system, a government backed banking cartel with fractional reserves practices both fraud and theft via inflation AND is the chief culprit behind the boom-bust cycle, why not scrap it? Why is an honest foundation important in every other field but not finance?
OK Jim, while we slept 1/2 of the US banks merged into the 1st Aggregate Bank of America and the other 1/2 merged into the 2nd Aggregate Bank of America. All of the assets, equity, and liabilities have been added up and are now on two balance sheets. There are now just two US banks. We'll talk about the Fed later maybe. Here they are:
----------------------... Aggregate Bank of America (1st ABA)
Assets:---------------... + Equity
----------------------...
----------------------...
----------------------... Liabilities
IOU's-------------$9T-... Checking Accounts Deposits
----------------------... Checking Account Loans
Reserves------$11T
Total-------------$20T...
So we see that the 1st ABA has lent out 90% of its deposits (9T) while retaining a 10% reserve which when added to its equity equals a 11T reserve. The leverage is thus 19/11 = 1.727/1 . This is less than the legal maximum of 1.9/1.
Now the balance sheet for the 2nd Aggregate Bank of America:
----------------------... Aggregate Bank of America (2nd ABA)
Assets:---------------... + Equity
----------------------...
----------------------...
----------------------... Liabilities
IOU's------------$4.5T... Checking Accounts Deposits
----------------------... Checking Account Loans
Reserves-------$6.0T
Total-----------$10.5T...
The 2nd AGA has lent out 90% of its deposits (4.5T). Its leverage is 9.5/6.0 = 1.58/1. This is less than the legal maximum of 1.9/1.
Now for whatever reason (they are demand accounts, aren't they?) the customers at the 1st AGA decide to withdraw 12T and deposit it with the 2nd AGA. oops! 1st AGA is 1T short. Who is it going to borrow from now Jim? There are no other banks besides the 1st AGA and the 2nd AGA. The money doesn't exist! The 1st AGA created 9T of money from nothing and without another bank to borrow from is exposed as a counterfeiter. What good are the IOUs 1st AGA has? The 2nd AGA wants money not IOUs.
What about the Fed? Sure it can create some money from nothing and lend it to 1st AGA. That's its job, to back up the legalized counterfeiting ring know as our banking system.
"Money from nothing" which steals its purchasing power from the public at large.
There once was a goldsmith quite bold
who gave paper for storing folks gold.
He thought it more fun
to issue paper for none
and thus his integrity sold.
"If a bank tried to finance every day obligations with Fed Funds, that could be a troublesome sign. Most banks that borrow Fed Funds also lend Fed Funds soon after. " Jim Myrtle
OK Jim, while we slept 1/2 of the US banks merged into the 1st Aggregate Bank of America and the other 1/2 merged into the 2nd Aggregate Bank of America. All of the assets, equity, and liabilities have been added up and are now on two balance sheets. There are now just two US banks. We'll talk about the Fed later maybe. Here they are:
-----1st Aggregate Bank of America (1st ABA)
Assets:-------------Li... + Equity
----------------------...
----------------------...
----------------------...
IOU's---------$9T-----... Checking Acct. Deposits
----------------------... Checking Acct. Loans
Reserves----$11T
Total--------$20T-----...
So we see that the 1st ABA has lent out 90% of its deposits (9T) while retaining a 10% reserve which when added to its equity equals a 11T reserve. The leverage is thus 19/11 = 1.727/1 . This is less than the legal maximum of 1.9/1.
Now the balance sheet for the 2nd Aggregate Bank of America:
-----2nd Aggregate Bank of America (2nd ABA)
Assets:--------------L... + Equity
----------------------...
----------------------...
----------------------...
IOU's--------$4.5T----... Checking Acct. Deposits
----------------------... Checking Acct. Loans
Reserves----$6.0T
Total-------$10.5-----...
The 2nd AGA has lent out 90% of its deposits (4.5T). Its leverage is 9.5/6.0 = 1.58/1. This is less than the legal maximum of 1.9/1.
Now for whatever reason (they are demand accounts, aren't they?) the customers at the 1st AGA decide to withdraw 12T and deposit it with the 2nd AGA. oops! 1st AGA is 1T short. Who is it going to borrow from now Jim? There are no other banks besides the 1st AGA and the 2nd AGA. The money doesn't exist! The 1st AGA created 9T of money from nothing and without another bank to borrow from is exposed as a counterfeiter. What good are the IOUs 1st AGA has? The 2nd AGA wants money not IOUs.
What about the Fed? Sure it can create some money from nothing and lend it to 1st AGA. That's its job, to back up the legalized counterfeiting ring know as our banking system.
Money from nothing which steals its purchasing power from the public at large.
There once was a goldsmith quite bold
who gave paper for storing folks gold.
He thought it more fun
to issue paper for none
and thus his integrity sold.
"If a bank tried to finance every day obligations with Fed Funds, that could be a troublesome sign. Most banks that borrow Fed Funds also lend Fed Funds soon after. " Jim Myrtle
OK Jim, while we slept 1/2 of the US banks merged into the 1st Aggregate Bank of America and the other 1/2 merged into the 2nd Aggregate Bank of America. All of the assets, equity, and liabilities have been added up and are now on two balance sheets. There are now just two US banks. We'll talk about the Fed later maybe. Here they are:
-.-.-1st Aggregate Bank of America (1st ABA)
Assets:-.-.-.-.-.-.-Li... + Equity
-.-.-.-.-.-.-.-.-.-.-....
-.-.-.-.-.-.-.-.-.-.-....
-.-.-.-.-.-.-.-.-.-.-....
IOU's-.-.-.-.-.$9T-.-.... Checking Acct. Deposits
-.-.-.-.-.-.-.-.-.-.-.... Checking Acct. Loans
Reserves-.-.$11T
Total-.-.-.-.$20T-.-.-...
So we see that the 1st ABA has lent out 90% of its deposits (9T). The leverage is thus 19/11 = 1.727/1 . This is less than the legal maximum of 1.9/1.
Now the balance sheet for the 2nd Aggregate Bank of America:
-.-.-2nd Aggregate Bank of America (2nd ABA)
Assets:-.-.-.-.-.-.-.L... + Equity
-.-.-.-.-.-.-.-.-.-.-....
-.-.-.-.-.-.-.-.-.-.-....
-.-.-.-.-.-.-.-.-.-.-....
IOU's-.-.-.-.$4.5T-.-.... Checking Acct. Deposits
-.-.-.-.-.-.-.-.-.-.-.... Checking Acct. Loans
Reserves-.-.$6.0T
Total-.-.-.-.$10.5T-.-...
The 2nd AGA has lent out 90% of its deposits (4.5T). Its leverage is 9.5/6.0 = 1.58/1. This is less than the legal maximum of 1.9/1.
Now for whatever reason (they are demand accounts, aren't they?) the customers at the 1st AGA decide to withdraw 14T and deposit it with the 2nd AGA. oops! 1st AGA is 3T short. Who is it going to borrow from now Jim? There are no other banks besides the 1st AGA and the 2nd AGA. The money doesn't exist! The 1st AGA created 9T of money from nothing and without another bank to borrow from is exposed as a counterfeiter. What good are the IOUs 1st AGA has? The 2nd AGA wants money not IOUs.
What about the Fed? Sure it can create some money from nothing and lend it to 1st AGA. That's its job, to back up the legalized counterfeiting ring know as our banking system.
Money from nothing which steals its purchasing power from the public at large.
There once was a goldsmith quite bold
who gave paper for storing folks gold.
He thought it more fun
to issue paper for none
and thus his integrity sold.
"If a bank tried to finance every day obligations with Fed Funds, that could be a troublesome sign. Most banks that borrow Fed Funds also lend Fed Funds soon after. " Jim Myrtle
OK Jim, while we slept 1/2 of the US banks merged into the 1st Aggregate Bank of America and the other 1/2 merged into the 2nd Aggregate Bank of America. All of the assets, equity, and liabilities have been added up and are now on two balance sheets. There are now just two US banks. We'll talk about the Fed later maybe. Here they are:
1st Aggregate Bank of America (1st ABA)
Assets: Liabilities + Equity:
Equity:
$1T
IOU's: Liabilities:
$9T $10T Checking Acct. Deposits
$9T Checking Acct. Loans
Reserves:
$11T
Total:
$20T $20T
So we see that the 1st ABA has lent out 90% of its deposits (9T). The leverage is thus 19/11 = 1.727/1 . This is less than the legal maximum of 1.9/1.
Now the balance sheet for the 2nd Aggregate Bank of America:
2nd Aggregate Bank of America (2nd ABA)
Assets: Liabilities + Equity:
Equity:
$1.0T
IOU's: Liabilities:
$4.5T $5.0T Checking Acct. Deposits
$4.5T Checking Acct. Loans
Reserves
$6.0T
Total:
$10.5T $10.5T
The 2nd AGA has lent out 90% of its deposits (4.5T). Its leverage is 9.5/6.0 = 1.58/1. This is less than the legal maximum of 1.9/1.
Now for whatever reason (they are demand accounts, aren't they?) the customers at the 1st AGA decide to withdraw 14T and deposit it with the 2nd AGA. oops! 1st AGA is 3T short. Who is it going to borrow from now Jim? There are no other banks besides the 1st AGA and the 2nd AGA. The money doesn't exist! The 1st AGA created 9T of money from nothing and without another bank to borrow from is exposed as a counterfeiter. What good are the IOUs 1st AGA has? The 2nd AGA wants money not IOUs.
What about the Fed? Sure it can create some money from nothing and lend it to 1st AGA. That's its job, to back up the legalized counterfeiting ring know as our banking system.
Money from nothing which steals its purchasing power from the public at large.
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1st Aggregate Bank of America (1st ABA)<br>
Assets: &... Liabilities +
Equity:<br>
&a... &a...
&a... &a... Equity:<br>
&a... &a...
&a... &a...
&a... $1T<br>
IOU's: &n... &a...
Liabilities:<br>
&a... $9T &a...
&a... $10T Checking Acct. Deposits<br>
&a... &a...
&a... &a...
&a... $9T Checking Acct. Loans<br>
Reserves:<br>
&a... $11T<br>
Total:<br>
&a... $20T &a...
&a... $20T
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