Economic Sense and Nonsense


noun: economy; plural noun: economies
  1. the wealth and resources of a country or region, esp. in terms of the production and consumption of goods and services.
    synonyms: wealth, (financial) resources;
    financial system, financial management, “the nation’s economy”

    financial system, financial management
    “the nation’s economy”
    • a particular system or stage of an economy.
      “a free-market economy”

  3. careful management of available resources.
    “even heat distribution and fuel economy”
    synonyms: thrift, thriftiness, providence, prudence, careful budgeting, economizing, saving, scrimping, restraint, frugality, abstemiousness

    “one can combine good living with economy”
    antonyms: extravagance

               — from Google

    When is enough enough? When do economic ‘deep thinkers’ pull their heads out of their asses and realize there is more to economics besides cheerleading exponentially increased numbers of new cars, tract houses and the latest from Apple? Don’t these people understand entropy? Selling tens of billions of new cars would certainly be good for the car business but what about everything else?

    Right now we are destroying our life-support system so that a relative handful of individuals can become ‘rich’ … adverse conditions apply to wealthy and poor alike. After we screw up there is nowhere ‘off planet’ for the rich to go.


    Dead or alive? Schrödinger’s markets


    “True economic health will be known only when stimulus is removed!” says Financial Times.

    Rude good health is when our nature-raping monstrosity is able to cannibalize its own capital without any special help from the government. Of course, our irreplaceable capital must be continually annihilated faster because that rate of increase represents ‘growth’; the annihilation process is collateral is our ‘wealth’. We’ll know when we’ve finally reached the highest level of success when we fail spectacularly, when everything blows apart.

    What is wealth, you ask? Do you really want to know?


    Central banks have flooded the financial system with cash, driving investors to park their money in higher-yielding securities and largely obfuscating the true state of underlying markets.

    Take, for instance, the corporate default rate and the analytical models that are supposed to he …


    Blah, blah, blah! Everything the Financial Times writes after the words ‘Central Banks have’ is utter nonsense. The remark is designed to mislead. Either the highly regarded author of the piece is a complete moron who doesn’t know the first thing about finance or the Time’s staff knows better and is mouthing a client’s company line.

    People who claim the central banks print money are peak oil deniers, as it is the high and increasing real cost of fuel that is slowly and certainly strangling industrial economies. $110/barrel crude does not bring any more goods or services into this world than did $20 crude. The difference is prices is simply a tax levied by our past economic success against every current — and future — fuel user! Central banks cannot drive money costs low enough to compensate for rising costs of fuel. $110 Brent is the equivalent of a 5% or higher policy rate. Add this to the penalty rates levied against countries in Southern Europe and the result is +10% interest for sovereigns and banks … no surprise that Europe is falling apart.

    Fiddling with interest rates won’t deflect fuel prices: even if lenders pay customers to borrow there is no re-lending of fuel resources. When they are gone they are gone …

    Common sense lesson for Financial Times: central banks cannot ‘print money’ because they are collateral constrained, that is, they cannot make loans that are greater than the worth of collateral they take on as security. When central banks issue funds they are always very careful to accept ‘high-quality’ collateral from borrowers when they do so. Since finance institution collateral is promissory notes from loans already made, the central bank does nothing but refinance existing debt; no new money is created.

    A central bank can make a $10 billion loan against $10 billion in collateral but not a loan greater than that amount; it generally offers less than par; giving collateral a haircut. Only private sector finance institutions can make ‘unsecured’ loans; that is, lending increased amounts over and over against the same collateral … or against no collateral at all. Commercial banks have underwriting departments that determine whether a borrower can repay or not, whether he will be able to borrow tomorrow so as to retire the loan he seeks today. Central banks are dependent upon private sector credit creation => finance lends to itself because it can book ‘wealth effect’ gains-on-paper => this assures future loans = the finance marketplace is a self-perpetuating Ponzi scheme that serves to dump hundreds of borrowed billion$ into the pockets of tycoons.

    The rest of us are obliged to repay these loans …

    Private sector finance has a capital structure, an ownership interest/equity with the capacity to ‘sell’ risk at a discount to others. Central banks are ‘reserve banks’; they have no capital to speak of, they are risk absorbers. Returns are not retained but are paid to the treasury. Central banks are balance sheets and nothing more: assets and liabilities are always balanced … all loans are secured, they have to be. If not, the central bank is instantly another commercial bank and insolvent for the same reason; excess leverage. The ruined cannot rescue the ruined: there would be no lender of last resort, no entity able to fix asset prices or reassure markets and depositors. The entire banking system would teeter, there would be runs out of it.

    Right now there are signs that central banks have exhausted collateral and are inching toward leveraged lending, toward insolvency. Evidence is capital flows out of countries such as China.

    If a central bank was to make an unsecured loan to any one bank, all the other commercial banks would demand the same treatment. Banks would quickly borrow unlimited amounts without offering collateral. Private sector banks do not leverage the Fed or other central banks because they are disciplined but because they are unable to do so; they must offer collateral and there is not enough to go around.

    Keep in mind, real, physical collateral evaporates under everyone’s nose. Vast amounts of money are lent into existence to gain fuel, the fuel is instantly burned for nothing — at the end of the day there is no more collateral. What remains after each successful loan-for-fuel transaction is the need for even more loans and more fuel to burn. Collateral for the entire system ceases to be a thing but ‘demand’ for things to destroy. This destructiveness is the underlying health of the economy we are all supposed to be concerned about!

    Because the greatest amounts of debt have been taken on to buy fuel in some form or other, use of the fuel = destruction of the collateral. The only thing that allows this process to continue us is our purposeful and collective refusal to understand the true nature of collateral … or to accept what we are doing as a form of collective insanity.

    Something to keep in mind: when central banks conduct open-market operations such as quantitative easing (QE) it creates excess reserves. By doing so the central banks effectively create guarantees of commercial bank deposits. These reserves emerge from the shadows when there is a redemption demand, by depositors seeking their money … as during a bank run. It might be interesting to know why central banks seem intent on guaranteeing bank deposits in this way. Is there something that the central bank is not telling us?

    Because of faulty reasoning and desire to maintain the status quo at all cost, the banking system looks ready to unravel at the drop of a hat … of course, nobody will have seen it coming!

    Banks failed all over the world after Creditanstalt collapsed in 1931. There was a gigantic run, depositors demanded gold which the holders were loathe to part with. The result; velocity cratered which increased the demand for circulating money which was in turn held more tightly is a vicious cycle.

    Creditors called in loans; borrowers who retired their loans saw their repayments extinguished. This is how the money-creation process works: money appears when it is loaned into existence then extinguished when the loan is repaid. In the early 1930s, the demand for currency was increasing even as currency supply was being diminished; the result was a scarcity premium attached to money. It became impossible to find enough of the expensive currency to retire the remaining loan balances … this in turn caused defaults and decline in worth of non-money assets in yet another, complimentary vicious cycle.

    By 1933, most US banks were permanently closed except for those in two states (Manchester). When Roosevelt was inaugurated he declared a state of emergency and ordered Congress to prepare for an all-out effort to end the banking crisis. The Congress quickly authorized a seven-day bank holiday which provided time for the Treasury to print $700 million in currency; this was then flown to the Federal Reserve banks for distribution to commercial banks. This cash infusion allowed the banks to reopen and pay circulating money to depositors (who could then turn around and repay their own loans).

    Repayment to depositors was limited to currency as it could be printed rather than dug out of the ground or ‘bought’ with cripplingly high interest rates in the international market as had been the case up to that time. FDR and Congress removed specie out of circulation — it was already hoarded out of circulation and most gold holders were banks or speculators — and outlawed the predatory gold clause in contracts. The dollar was depreciated 40% against gold as well as against European currencies that were still pegged to gold. Without a gold peg to defend or gold hoards to increase, US interest rates retreated and nominal commodity prices including agricultural goods increased. The US stock market reached its lowest level (inflation adjusted or nominal) and began to rally. FDR had bailed out the banks, and by doing so he bailed out much of the rest of the US economy!

    After the immediate bailout, the government insured bank deposits, began to regulate Wall Street trading, separated ordinary deposit banking from finance underwriting, insurance and other forms of gambling. FDR also used federal money to employ some of the millions of young, unemployed men and women. His most successful programs were Works Progress Administration, Tennessee Valley Authority, Civilian Conservation Corp, the pro-union Wagner Act, Social Security, then later the Agricultural Adjustment Act.

    Today, the entire banking system is insolvent w/ banks’ non-government assets being worth far less than their face price. What keeps banks and bank-like entities afloat is dishonest accounting/mark to fantasy and the defective understanding (hope) that the central bank will lend against these impaired assets @ near-par. At some point every asset will be carefully measured on more rational grounds. Fantasy worth will be rejected: the result will be a massive hit against banking system liabilities which will result in banks closing — as during the 1930s.

    In the 1930s, bank balance sheets were lopsided; assets were often stocks bought during the Great Bubble or accumulated immediately after the crash — collected by way of margin calls. Assets also included inflated mortgages on now-worthless land. Bank liabilities were minuscule relative to the pyramid of assets; the loss of only a small amount of asset worth wiped out bank capital and impinged on liabilities. Banks closed rather than hand out their remaining deposits, some of which wound up in the Treasury and the central bank as non-balance sheet custody items. One could say the Treasury got a good deal, for $700 million in public currency the Treasury gained control over billions, at the same time it retired claims (liabilities) that would have otherwise contributed to the bankruptcy of the entire system.

    What would bankrupt the system today is situational awareness, the recognition of systemic insolvency. Right now the Depression-era depositor guarantees protect against one or two banks failing due to insolvency and over-leverage, not against all the banks being insolvent and over-leveraged at the same time. Ordinarily, if one bank fails, liabilities are shifted from the failed bank to other, solvent institutions. As discussed previously, when the entire system is over-leveraged, shifting funds from one failed bank to another is futile; all the banks are in effect a single, giant bank; depositor funds are trapped therein. Unlike in 1934, it would take far more than $700 million to refloat the system by making depositors whole with currency; it would take years for the government to produce even the smallest part of total liabilities (insured deposits) in paper money. There is over $7 trillion deposited @ banks, there is less than $1 trillion in currency, 40% of that is overseas. Seven trillion dollars is seventy billion $100 bills, there isn’t enough paper or ink! This is the problem with the post-modern bank run; depositors are unable to gain currency/circulating money because there isn’t enough time or resources to print it. On the other hand, shifting funds from one depository to another is pointless because all of them are bankrupt.

    When the central bank begins to offer unsecured loans and to leverage its collateral thereby, then the entire system from the largest to the smallest bank is insolvent. Afterward, the Treasury — with its massive imbalance of debits vs. liabilities as well as incompetent, criminal management — becomes insolvent. This is what Irving Fisher was describing in 1933.



    Those who imagine that Roosevelt’s avowed reflation is not the cause of our recovery but that we had “reached the bottom anyway” are very much mistaken. At any rate, they have given no evidence, so far as I have seen, that we had reached the bottom. And if they are right, my analysis must be woefully wrong.

    According to all the evidence, under that analysis, debt and deflation, which had wrought havoc up to March 4, 1933, were then stronger than ever and, if let alone, would have wreaked greater wreckage than ever, after March 4. Had no “artificial respiration” been applied, we would soon have seen general bankruptcies of the mortgage guarantee companies, savings banks, life insurance companies, railways, municipalities, and states. By that time the Federal Government would probably have become unable to pay its bills without resort to the printing press, which would itself have been a very belated and unfortunate case of artificial respiration. If even then our rulers should still have insisted on”leaving recovery to nature” and should still have refused to inflate in any way, should vainly have tried to balance the budget ad discharge more government employees, to raise taxes, to float, or try to float, more loans, they would soon have ceased to be our rulers. For we would have insolvency of our national government itself, and probably some form of political revolution without waiting for the next legal election. The mid-west farmers had already begun to defy the law.


    If all this is true, it would be as silly and immoral to “let nature take her course” as for a physician to neglect a case of pneumonia. It would also be a libel on economic science, which has its therapeutics as truly as medical science.


    One possible fix would be to forget trying to print the needed amounts of currency and turn deposits into a federalized form of Bitcoin. Deposits could be held by individuals on their own personal computers rather than at failed-and-failing banks. That this might be a real strategy is indicated by Fed/Treasury interest in Bitcoin … not to shut it down but to make use of it.

    Make no mistake; if the banks fail in the US and money becomes unavailable as it was in Argentina in early 2000s, there will be disturbances in this country. Americans have put their entire faith in money, it has been elevated in the place of family- and community: this is the big difference between USA in 2013 and USA in 1933. Take away the money flows — even for a little while — and there are instantly very serious problems … panic, breakdown of money-dependent processes leading to shortages of critical goods, loss of confidence, public rage and sense of ‘nothing to lose’.

    There would be tremendous backlash against the bankers. It’s one thing for the bankers to steal from the middle class stealthily as they have been doing since 1980, but stealing at once in broad daylight would be too much to bear.

    Attempting to make depositors whole with insufficient banknote capability allows for the printing of ‘unconventional’ notes of very high denominations, such as the famous RM 1,000,000,000 note. Banknote insufficiency is a component of hyperinflation that must be kept in mind at all times. If a depositor demands $100,000 there is the temptation on the part of the government to offer that individual a $100,000 bill instead of a thousand $100 bills. The first large-denomination bill is accompanied by others which are superseded by ever- larger bills as nominal currency demand increases along with nominal deposits in yet another self-reinforcing cycle. System failure is not currency failure but that of system components and currency ‘trap’.

    Here is another highly-regarded thought leader who does not recognize that the world has been changed by our own success:


    23 years ago the world seemed much simpler. Francis Fukuyama wrote that the West had won the war of Capitalism. However, 23 years later things have changed. By 2016 the economy of China will exceed that of the U.S. This is not what Fukuyama expected in 1989. It should not be possible that a communistic society could poised to overtake a capitalistic economy. It is quite an amazing turn of events.

    The explosion of public debt in Western economies is a symptom of the more profound economic malaise. The argument between stimulus and austerity are very futile. The reality is that by 2050 interest payments on government debt will be above 100% of federal revenues according to the Alternative Fiscal Scenario (AFS) of the CBO. The AFS is the more realistic of the two assumptions that the CBO produces.

    If we look at the US and China per capita to GDP ratios we find that in 1978 the average American was 22 times richer than the average Chinese citizen. Today, that ratio is down to only 5 times. The great divergence of prosperity that was generated by the strength of capitalism is now the great re-convergance.

    There were “6 Killer Apps” that defined the U.S. during its great economic growth cycle.

    1) Competition

    2) Scientific Revolution

    3) Modern Medicine

    4) Consumer Society

    5) Work Ethic

    6) Property Rights

    Those issues allowed for growth, innovation and rising economic prosperity during the 20th century. Today, while the rest of the world has slowly been adopting these “killer apps” the U.S. is slowly losing them.


    Says the analyst …


    “I did not come to this country to participate in its decline.”


    How self-congratulatory … and how misleading. America’s ‘Killer Apps’ were largely a matter of luck: that FDR was in charge of America during the Great Depression rather than Herbert Hoover. The American banking system avoided collapse by a matter of days or weeks in 1933. It would have taken a long time for the country to recover afterward had deflationary matters been allowed to run their course. As it was, the bellicose states Germany and Japan recovered more quickly than America, enough to take advantage of the US’s economic weakness and inability to secure its own and allies’ overseas interests. The consequence was a titanic and unnecessary conflagration that took tens of millions of lives.

    Any number of different conditions or sets of conditions can be added to those above to explain why American industry succeeded completely during its, “great economic growth cycle”. Missing from this list includes cheap labor, access to sea trade, favorable demographics and helpful doctrine — the gently moderating Invisible Hand.

    Most important and left out are access to inexpensive energy resources and organic credit. The latter is critical: centralized industry is fundamentally loss-making; credit is required in order for industry to both take root and to carry forward. The difference between economic success or failure is whether a country has access to its own sources of loans or must rely on intermittent streams of external funds. With organic credit a country lacking resources can gain them in exchange for excellent-appearing empty promises.

    American colonies in the early-to-mid 1700s were at the mercy of their home-island lenders whose rapaciousness was a major cause of the Revolution. Banks in London would lend in the form of paper drafts — discountable bills issued at no cost to them. Borrowers were compelled to repay in gold or silver. Inability to pay in the ‘appropriate manner’ resulted in forfeiture as lenders deputized the Crown’s agents and by way of arbitrary writs dispossessed borrowers in kangaroo courts. One reason for this abuse was 75-plus years of costly warfare in North America between England and France.

    Enough abuses and the colonists rebelled. Afterward, Americans erected their own credit structure: a national treasury, an American currency, sufficient large finance institutions able to act as lenders of last resort and final guarantors of liabilities, then a central bank. America also had many local banks able to make loans or issue bills as well as a legal structure including enforceable private contracts.

    Indeed, it is only within the context of enforceable — and equitable — contracts do competition, consumer society, work ethic or private property matter.

    Likewise, the UK possessed its own organic credit which was necessary — along with the theft of Spanish-New World treasure — to finance the Industrial Revolution. This included the Bank of England, Britain’s country banks as well as merchant lenders and insurers within the City of London, the well-regarded and long enduring sterling currency and discountable bills-of-exchange; also commercial laws and the court system within which these would be exercised. With organic credit the iron machines and factories that made them were made possible in the first place as all had to be bought and paid for before they could be put to any use.

    Kenya was a country with ‘killer apps’ but no organic credit; like the other colonies it was dependent upon British credit and currency. Kenya’s economy ‘succeeded’ when credit flowed from the UK towards it, Kenya was ruined when credit rushed out. Blame for ruin was cast upon demographics: Kenya is a country filled with hapless Negro savages who deserve whatever they get. Demographics cannot explain the repeated failures of Ireland, a country filled with Caucasians; also a country that was — and is — a slave-state to external credit.

    Ireland: a country that once borrowed in sterling now borrows euros from the European Union; as such it is as much a colony as it ever was; ditto Greece, Spain, Portugal, Italy … France. Here is real Killer App: all EU nations are credit slaves to nothing or no-one … only each others’ foolishness and iniquity.

    “Growth, innovation and rising economic prosperity during the 20th century,” is the outcome of expanding credit and self-extinguished resources. A highly regarded economic thinker swings and misses:


    There is no such thing as “the central challenge to growth”. Proof is impossible to come by with respect to all macroeconomic controversies. Klein vapidly handwrings that, “Growth simply isn’t producing enough jobs” without meaningfully addressing the question of how to achieve growth, or addressing the arguments that Bernstein carefully catalogs for why a broader distribution might be growth-supportive. When Klein writes “fixing [unemployment] is necessary, though not sufficient, to making real headway against inequality”, he is making an empirical assertion without …


    The content of this relatively harmless and inoffensive article what one might expect. What matters is the repeated invocation of ‘growth’ and the absence of a “central challenge” to it. Evidence is easy to find, one need only drive to a gas station and fill ‘er up. The $3+ dollars squandered on each gallon in excess of the small change spent in identical transactions during earlier and better times is money that cannot be spent elsewhere: it subsidizes the decreasingly productive petroleum industry. Meanwhile, the collateral in the gas tank is burned up for absolutely nothing. The economist does not recognize the problem, in fact he likely believes he is contributing to a better world by adding to ‘demand’.

    The car cannot be paid for by driving the car … neither can the gas. The driver-economist could become a courier or taxi driver but there is very modest amount of commercial business for drivers so employed. The fuel customer must instead borrow; his boss borrows against the bank accounts of his company’s customers who in turn borrow from from their own customers’ banks which themselves borrow in turn. Multiply by the tens of millions driving to gas stations every day using borrowed money to buy gas … there is the central challenge to growth … there is no way to retrieve the gas … there is nothing to retire the loans!

    Arguing about non-existent growth is like arguing about transubstantiation. There is not point to it because thermodynamic physics rules, economics that ignores this is irrelevant. Instead, conventional monetary economics has become ‘the silly science’, useful only to the degree that it sheds some light on how far we will fall when we cross certain — and onrushing — thermodynamic thresholds.

    The time to invent a new economic regime is running out … one that rewards husbandry and capital conservation the way it rewards squandrous waste. Economics today has become the science of extravagance and nothing more. Economists relentlessly pimp living beyond our means as if this is a natural entitlement rather than a fatal wound. It is appalling how clueless, stupid and self-interested the economic management appears to be. This is failure of the highest order, the willfully blind are leading the rest over the precipice.

    Pre-crash bull Irving Fisher famously predicted two weeks before the 1929 crash that, “Stock prices have reached what looks like a permanently high plateau …” During the run-up to the crash, Fisher had become wealthy by way of his analysis, he was a famous and highly regarded economist. The depression that followed the crash cost Fisher his fortune. Nevertheless, he was possessed of enough integrity to reconsider his prejudices and analyze carefully the dynamics that brought his world — and himself — to ruin.

    Now it is time for the rest of the analysts to follow suit …

44 thoughts on “Economic Sense and Nonsense

  1. ellenanderson

    Great post. I look in vain on all of the likely finance sites to see anyplace where this very cogent viewpoint is affirmed. Perhaps everyone who “gets it” immediately becomes a believer in Near Term Extinction and stops talking about political economy in the real world?
    I am not naive enough to think that there is an easy political solution but I don’t believe that we are all going to be immediately struck dead when the financial system fails. So we should think about what will make sense in the aftermath of the upcoming crash. It too bad that Roosevelt was such a courageous and clever man. Looking back on all that has happened it might have been better for the collapse to have happened back then before all of the damage to the environment and our social relations. I refer people back to your early post “Betty David Eyes.” You should post a link.
    Now all of the farms have been paved, the families & communities fractured, and the environment poisoned at a global scale. And WWII gave us nuclear power as well. It is enough to make you a fan of Herbert Hoover. We have to hope that this time there is no way to save capitalism, socialism, communism, consumerism, modernism.
    If I got to advise a candidate and advocate for public policy I would limit corporate charters (revoking all current ones and making them reapply) and I would make usury a crime punishable by life in prison. It would be a good start.
    Our little library has started a seed bank and we have enough to get everyone in town growing food next spring if they wish. Our Grange tests soils and tries to educate about soils science and farmers values. These are things we can do and goals we could have. Plus, everyone who understands these issues should get out and run for public office.
    Steve from Virginia for President?

    1. steve from virginia Post author

      It is surprising how much seed is necessary so that one person might live for one year. We eat a lot of grass seed, directly and indirectly and it all represents a lot of grass plants.

      Seed banks = must be BIG!

      1. ellenanderson

        Fortunately for us, grass is perennial so you have to keep it well nourished and not overgrazed and it is a way to turn solar energy into food. I prefer goats over cows because they are more efficient and better for peasant societies.
        There are a number of libraries involving themselves in seed lending. You check out a few seeds in the spring, learn how to grow the plant and harvest seeds. Then you return your seeds so the library grows. We have had professional growers coming in to teach us how to pick the best seeds and preserve them. (Hint: don’t eat the very best veggies, save them for their seeds.
        In this way, local vegetable varieties will be developed over the years.)
        Put your election slogan back up!!

      2. steve from virginia Post author


        Put your election slogan back up!!

        (I don’t remember what it was … )

  2. Ken Barrows

    “When central banks issue funds they are always very careful to accept ‘high-quality’ collateral from borrowers when they do so.”

    Are you saying the MBS meet this definition? My (mistaken?) impression was that the Fed pays a lot more than the current market price, even if it is paying par.

    1. steve from virginia Post author

      The central bank intends to offer vitamins not candy.

      It will trade its credit — which is supposed to be always ‘good’ — for the best assets the private sector banks hold. MBS are of varying ‘quality’: some is GSE paper such as Fannie/Freddy issue. Most if not all the QE buying is of this paper, with implicit govt guarantee.

      There are political considerations: QE1 was the Fed swapping MBS held overseas for Treasury securities. Many of these mortgage bonds were fraudulent and defective. Having the Fed buy these securities was preferred to having an embarrassing scandal play out involving our biggest banks on one hand and our trade partners on the other.

      During a money panic there is a chance that a central bank will accept through the discount window any negotiable instrument including CDO’s, ‘junk’ bonds, discountable bills/letters of credit … where there is a market under ordinary circumstances but not during a panic.

  3. RobM

    Another masterpiece. I have been making a serious effort to understand how the world actually works for several years. My confidence of late is rising but every time I read a new article by you my confidence drops. Your perspective is unique, valuable, and sometimes hard to digest.

    Two questions I hope you might have time to answer.

    1) A big theme you have been discussing is the idea that central banks cannot print money because they only loan against collateral. I am of the opinion that governments can not and will not be able to repay the debts they are accumulating due to energy driven wealth decline of their taxpayers. What is the difference between a secured and unsecured loan if the collateral is worthless? If government debt is worthless, is it not correct that central banks are in fact printing money today?

    2) I suspect we both agree that there will be some form of banking collapse in the future. What does your reading of history and your understanding of how things might be different this time suggest is the best strategy for an individual? Specifically, if you had $100,000 of savings with no debt, how would you apportion it between:

    a) bank savings account

    b) cash

    c) monetary metal

    d) useful physical assets

    1. steve from virginia Post author

      A bank holds assets which are IOUs for loans the bank has made. Its liabilities are loans made to it by its customers (deposits). At all times you are an unsecured creditor to your bank.

      Ordinarily the bank manages its balance sheet by lending/borrowing overnight: the bank has an account with its ‘corresponding bank’. During ordinary day-to-day business, the bulk of the bank’s balance sheet is untouched. Funds in excess or needed are borrowed/lent to the corresponding bank @ overnight rate. That is what that ‘Libor’ business is all about … the credit cost of overnight loans between banks.

      When there is a panic — for any reason — depositors seek to remove their funds. Cash on hand @ the bank is quickly exhausted, so are bank reserves held at the central bank. The commercial bank’s balance sheet collapses because depositors are removing their funds — the bank accordingly attempts to raise funds (credit) by selling assets. However, the market for assets dries up just when it is most desperately needed, when assets are dumped on the market at once leaving few buyers. This is the ‘paradox of thrift’ in action. An IOU representing a $50 million loan that fetches the same price under ordinary circumstances sells instead for a small fraction of that in a panic. Rather than dump on the market, the bank offers the note as collateral to the central bank for $49.5 million in credit. This is then forwarded to the depositors’ new bank(s).

      With the central bank as lender of last resort, there are always (should) sufficient funds to meet depositor demands. After all, only a few banks are effected, the banks have more than enough assets w/ inflated prices and the need to meet is in the form of computerized credit.

      When customers realize the bank can meet any demand made against it, they return their funds to the bank. The entire credit/sale transaction is unwound, credit flows back to the central bank which returns the IOU. Everything is ‘back to normal’.

      During the panic, what changes is market dynamics which cannot consider asset worth. The central bank acts because the market is bent … through no fault of its own. Given a time-out the market will revert, assets price @ $50 million will be worth $50 million (discounted appropriately according to their term, of course.)

      Sometimes banks fail, some are mismanaged, business conditions change at the end of a credit cycle. The central bank is able to support the system while the damaged few are merged with healthier institutions and the banking enterprise continues on as before.

      Fast forward to now and IOUs are defective because of repayment difficulties on the part of bank customers and their ongoing inability to borrow. Not just a few but the entire gamut of banks is insolvent. The market isn’t bent, rather the price signal is unpleasant and undesirable. The central bank and its clients pretend there is an ongoing money panic and swap assets @ face price. They avoid marking to market as to do so would destroy the system … the same way Irving Fisher described.

      Refusing to mark-to-market is intellectually dishonest but the cost of such dishonesty is less than the cost of conventional alternatives. Central bank ‘easing’ takes the public form or excess reserves not circulating money. These reserves become available to the depositors in the event of a bank run, when ordinary reserves are exhausted and banks’ balance sheets are collapsing. In general, the aggregate balance sheets will collapse faster than the reserves can be deployed, this is what occurred in 1933-34: instead of monetary inflation there is deflation.

      BTW: Fisher was brilliant — America’s finest economic mind besides Minsky — but he was wrong about reflating economies that are overleveraged due to energy depletion. Such a thing cannot be done with money.

      a) Useful physical assets: Yes, keep your tools and keep them sharp. Skills are the best-of-all-possible tools.

      b) cash: most folks don’t have any, if there is a breakdown, they are dependent upon ATMs.

      c) monetary metal: Like a tool but remember, metals are only useful when you are trading them to someone else … !

      d) bank savings account: The observable trend right now is for the rich to ‘sell’ cash. They are buying real estate, fine art, investment-level consumables, collectibles, of course stocks and bonds, etc … all at ‘inflated’ prices. The rich might be fools but they know their own business which is money and wealth. Cash in banks looks shaky longer term. The giant banks are insolvent and cannot be bailed out. Most of the country’s $10+ trillion in deposits are held within the giant banks. YOUR bank might have your money (a string of numbers on a screen) but the giant bank will be holding it as their liability … commingled in accounts along with trillion$ of derivatives! If that bank fails then your deposits are trapped … even if your own bank is ‘open’. Remember, at all times you are an unsecured creditor to your bank, your relationship to the bank as well as the government is as a ‘counterparty’; neither have any intrinsic obligations to you.

      As with all pyramid schemes, first out is best, to try to reduce exposure to the ‘system’ is the best approach.

      1. RobM


        I understand that a lot of QE is sitting as reserves and not circulating. But some of the QE is being used to buy government debt and this credit is circulating because governments spend the money they borrow. Assuming the government can not and will not repay their debts, how can this portion of QE not be inflationary?

      2. steve from virginia Post author

        Assuming the government can not and will not repay their debts, how can this portion of QE not be inflationary?

        – When the central bank buys a government security (IOU) it is simply taking custody of a loan that has already been made. The IOU becomes a security once it changes hands. Because government securities differ from currency only because of their term (coupon) they are considered to be as such … (with inflation/deflation risk appended to longest dated issues).

        – For inflation to occur, the lender must make more than one loan against one item held as security. A central bank as explained previously cannot do this. The private sector makes unsecured loans all the time. Inflation in the ordinary sense is a private sector phenomenon … the increase over time of unsecured debt(s).

        – A reason for all the bleating about QE is to deflect attention from the role of the private banking system w/ regard to inflation. Wall Street does not need the ‘help’ of the central bank to lend vast sums to itself; private banks need only a willing borrower. By lending to themselves/each other there is created within finance a ‘Perpetual Ponzi’ with unlimited debt from shadow banking becoming speculative fodder for ‘black pools’ and hedge funds. There is no reason why Goldman-Sachs & Co cannot push the Dow past 1,500,000,000,000 … what the Dow would really be worth under those circumstances would be quite another matter. BTW: Dow past 1.5 x 1012 = hyperinflation w/ no Fed.

        – Central banks offer moral hazard, a (nonsense) guarantee in event of Wall Street failure. Low rates propel carry trades which direct Wall Street loans overseas, investment in Peru and Myanmar rather than in the US.

        – Governments never have problems with debt unless they choose to do so. A government can always borrow more (it’s free money to the lender) or it can print its own in a pinch. It can also declare some other ‘good’ as money and make use of it as a means to retire debt (platinum ‘coins’). What can a lender do? The government has an army, the lender doesn’t … unless the loans are made in the lender’s currency to another country (euro). If a country like Greece cannot borrow its drivers cannot buy gasoline.

        Ironically, the treasury of a country can only become bankrupt when the treasury narrows its concept of ‘assets’ to money and money instruments; then the instruments and the treasury itself are discredited. Unless business destroys the material foundation of the country with its short-sighted and frenzied greed, the assets of the US are worth many multiples of all the debt in the world: thousands of trillions of dollars. Money cannot keep people alive … how about the land, air, water and watersheds, minerals and energy resources, forests, fields and meadows, animals and plants, ecology and natural services, human potential and civil services … how much are these things worth?

        Remember, money is (always) the corpse of capital.

        With the central bank in the market you have all the participants trying to front-run each other at once. As an outcome, interest rates decline for awhile as there is a high ‘floor price’ for government debt. These low rates paid by governments aren’t particularly useful as interest demanded from ordinary borrowers remains high. This ‘spread’ between rates is called a ‘Liquidity Trap’. The situation with regard to lending rates is circular and self-reinforcing like that in the petroleum markets: low rates reduce bank returns/increase risk while higher rates adversely affect borrowers’ ability to repay which reduces bank returns by the back door.

        There are multiple causes for hyper-inflation, including policy errors by finance ministers, currency arbitrage, sanctions and counterfeiting (as during the American Revolution) and money-capital flows. The flow of thousands of tons of gold and silver into Europe from the Spanish Main in the 16th century caused painful, continent-wide hyperinflation that lasted almost the entire period. The Weimar hyperinflation included France, Poland, Austria; the cause was unsterilized flow of investment gold into Europe after the end of WWI. Wars are a major cause of hyperinflation also imbalances in the nature of claims against currency. It is hard to think of a period of hyperinflation caused by a central bank making too many secured loans although many make this claim.

      3. RobM

        Thanks kindly. Very interesting.

        1) I thought Weimar hyperinflation was caused by Germany paying reparations it could not afford with money it printed. I will have to re-read Adam Fergusson’s “When Money Dies”. Or if you think he has it wrong, who should we read?

        2) You make it sound like there are no consequences for governments (which control their currency) to spend more than the growth of their taxpayer’s incomes allows. I’m sure you don’t believe this, so what is your perspective on what constrains government spending?

      4. steve from virginia Post author

        Number 1:

        Reparations to the French were paid in kind and only for a short period: train loads of coal, timber, other raw materials and ‘industrial clinker’ such as iron- and steel billets. This occurred only as long as the French army occupied Dusseldorf immediately after the war. Once the French left the Germans defaulted and ceased regular shipments.

        France, Belgium and England demanded gold reparations but the Germans were loathe to give it up, the allies were being prompted by the Americans to repay war debts to US banks, also in gold.

        These bank loans had been made in paper, of course …

        The Wiemar papiermark inflated strongly after the war as there was very little in the way of domestic commercial output; this meant pent-up demand for consumer goods and an excess of marks. Countries at war generally do not restrict the issue of currency as the last thing a country’s leadership wants during a war is a finance crisis. Because there was little in the way of non-military goods to spend this money on it was hoarded. When the war ended this currency flowed back into circulation all at once … as soon as more consumer goods appeared … which is why there was inflation across Europe, not just in Wiemar.

        The goldmark was retired during 1914, as it was, the government did not issue enough debt so as to soak up the gold flowing into the country, Germans holding papiermarks began to offer them for gold instead … and ultimately for everything else such as shoelaces and pathetic bits of bread. Gold was another consumer good that everyone wanted to get their hands on.

        The idea that France, Belgium or the UK would accept German paper money for war reparations is complete nonsense.

        Other factors contributing to hyperinflation were the pauperization (‘Paperization’) of the German middle class during the wartime, the shrinkage of farm population as a result of war casualties, the general shunning of Germany following the Treaty of Versailles and the assassination of Walter Rathenau in 1922. It is likely that Germany would have avoided the worst of the hyperinflation had Rathenau remained alive and able to influence events. The French occupation of the Rhineland in 1923 did not help: kicking a hapless Wiemar government while it was struggling.

      5. steve from virginia Post author

        Number 2:

        In general, I don’t have a problem with debt per se … it is what is done with the debt. Taken on to finance consumption it is ruinous; that unfortunately includes the bulk of all current lending particularly in the private sector. To borrow so as to build roads, reactors, airplanes, ocean-going ships, real estate, military hardware or to buy fuel to waste is economic suicide. Borrowing to finance a transition to a non-consumption economy is sensible and humane … and it will be necessary.

        Sector balance sheet: think of a country (or economy) as a gigantic ledger. There are two sides or components: the private sector and the public sector. The private sector is required to show a surplus (otherwise, there is no point to a private sector at all). For that sector or components within the sector to gain a surplus, there must be within a corresponding deficit elsewhere. The private sector cannot run deficits for longer than the shortest periods as to do so would put the sector out of business. At the same time, half the private sector cannot run surpluses while the other half runs deficits as failures tend to compound = ruin of the entire private sector.

        The private sector cannot gain wealth for itself any more than a transplant patient cannot gain a new kidney from himself.

        The public sector is not a firm; governments can run perpetual deficits and still remain in business. These deficits are what comprise private sector surpluses. The $16+ trillion deficit run by the US government is the private sector’s $16 trillion in wealth. Get rid of the deficit and say goodbye to private sector wealth. The deficit can be carried by overseas governments — mercantilism — or one country can provide a gross deficit for the rest of the world, as the US does now. Remember, our government borrows from the private sector, the manufacture of debt is America’s last real industry.

        Problems? The ‘wealth’ is numbers on a screen, with diminishing connection to anything real. The more successful our ‘economy’ is, the more monetized, the less resources we have, the more impoverished we become. Our society does not produce value but annihilates it, instead. We have nothing to show for our wasted massive resource bounty but a wrecked ecosystem, the bloat of human flesh and a bunch of used cars.

        Debt problems emerge when the various numbers become too large; managers lose their credibility, then confidence is lost in the managers.

  4. charlie

    I read a screed somewhere on the origination of the holiday for Christmas. To the best of my recollection it was you who wrote it in a reply to what someone else had posted. If it was you, do you remember where and when it was posted, and how can I get to it?? If not; maybe some one on the board remembers and knows how to get to it. TIA


  5. Reverse Engineer

    “The Congress quickly authorized a seven-day bank holiday which provided time for the Treasury to print $700 million in currency; this was then flown to the Federal Reserve banks for distribution to commercial banks. This cash infusion allowed the banks to reopen and pay circulating money to depositors (who could then turn around and repay their own loans).”SfV

    Not to beat a dead horse, but no time is needed to print paper currency anymore, since few people use it anyhow. All that is needed is to make digibits accessible through credit/debit cards.

    Where do said digibits come from if the Banking system is insolvent and Da Goobermint is broke? Make em up out of thin air like Lincoln’s Greenbacks, call them Greenbits.


    1. Chartist Friend

      talk about a conversation stopper…
      maybe this will get the cats to release your tongues

      Zero Hedge Is A Goldman Sachs Psychological Operation


      C’mon dude, keep it clean!

      Yr gonna make me hurl …

                — Steve

    2. Jb


      Why didn’t you put notations at 2005? Once again, we’ll just have to wait and see if the correlation holds. Give it six more months?

      1. steve from virginia Post author

        I would really appreciated it if you or someone else could actually provide evidence that Goldman or some other Giant Bank is behind Zerohedge. I always figured it was Pete Peterson …

      2. Chartist Friend

        in my opinion if there is subterfuge going on then it has nothing to do with ideology or policy – that’s the last thing wall street cares about unless you’re one of the few who has cashed out to run the cfr or work in dc

      3. ellenanderson

        Here is what Google says:
        “Tyler Durden
        You don’t have access to this information.”
        I used to think he was Bruce Krasting but I forget why I thought that.
        I guess you want to know who is funding the site, right? It is probably a libertarian think tank of some sort. I am surprised that no one knows by now. NSA must know.
        Zero Hedge is clearly a peak-oil-denier site so the editors are likely ideologues of the wrong sort. I think the same of Naked Capitalism even though I think Yves is earnest and hardworking.
        I just can’t believe the hand-wringing over whether Social Security will run out in 2025 or 2029. We will be lucky if that is the worst of our problems that that time.

      4. steve from virginia Post author

        Krasting is wrong about Social just like he’s been since he started his blog. He just doesn’t ‘get it’ that the Federal Government can borrow to meet any shortfall in the SS account.

        All else being equal — no fuel/climate crisis — the demographics favor Social and other pensions including the gold-plated pensions for industrial workers and government employees. Over time people die of old age … when that occurs they stop collecting retirement benefits. New hires have a different benefit structure and debts incurred to pay retirees are themselves retired by increased prices to customers or taxes to younger workers. Krasting always makes it seem as if the Treasury is going to go out of business if it adds to its debt … like it would if it was a firm.

        Money to retirees is money injected into the economy instead of directed toward Exxon, Toyota & Saudi Arabia. Krasting’s bleating about Social is defense of the precious cars at all cost.

  6. dolph

    Take your nonsense and etc.


    C’mon dude, keep it clean!

    Yr gonna make me hurl …

              — Dolph

    1. steve from virginia Post author

      I can’t for the life of me grasp the regulatory obsession with cheese and milk. It isn’t like people are dropping like flies … as on the adjacent highways. One would think persecuting pot smokers would be enough. Obviously, once the regulatory impulse gains momentum it cannot be undone …

      1. ellenanderson

        Big ag is behind it. They have captured the FDA and they put out all sorts of scary propaganda to local boards most of whom think the only good bacteria is a dead one. They actually send swat teams out to raid farms and destroy their products. Check out the Farm to Consumer Legal Defense Fund site. (Most people think that food should be as sterile as possible. For industrial food systems that is probably true.)
        Industrial agriculture is terrified of the local food movement, especially dairy. It is very silly of them. There is no way right now that these small dairies can provide enough good milk and cheese at prices that can compete with industrial food. Big ag should knock it off. They are doing a better job of organizing the masses than a politician could ever do.
        Getting 300 people out to Foxboro on a nasty night to support their only remaining small family farm is a huge big deal. All of those folks had to turn of their TVs and show up. If there is to be real change it is going to be bottom-up from the local level and not from people standing outside of banks carrying signs – that has just turned into theater.
        This victory is, IMHO, a single step in a journey of 1,000 miles. Just as you can’t print oil, you can’t print food.

  7. ellenanderson

    Good interview/podcast at NC today. Michael Hudson opining on Marxism among other things. I like the radio and podcasts because I can listen whilst doing other stuff.

    1. steve from virginia Post author

      Michael Hudson: “Money isn’t safe in the banks … buy gold bars … farmland!”

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