Money, Banking and the Fed

C

CaryP

Senior Member
Money, Banking and the Fed

There wasn't any place else to put this so I had to start another thread. I'm posting a link here that contains a 42 minute video about the topic of this thread. It's very educational about the economy, banking system and other crap we've all been brought up to believe in. If you want to know why and how we're headed for an economic crash watch the video. If you don't care, best of luck bucko. The page on the other end of this link is from the Von Mises Institute, an Austrian economic think tank. Austrian economics has been shown to be the only set of principles that work over the long term. I doubt many of you will watch the video because of its topic and length. For those of you who do watch it, there might be some terminology that you are unfamiliar with. Please feel free to post questions. I'll answer what I can. The video was made in 1996, but is still very relevant to where we are today and going forward. Just so you know, this video is a warning. Dismiss it at your own peril. Click on the link "Money, Banking and the Federal Reserve" to get the video. If you don't have some form of broad band, this will be long download.

Here's the link.

Money, Banking and the Federal Reserve

Yeeha,

Cary
 
Money, Banking and the Fed

Cary: Given that you have gone to the trouble of educating us fiscal dunces, it is beholden on us to DL and view the vid. It is DL'ing in the background now, as I have -Saved as- and am letting it run out of view.

Mah deepust thanks kind Suh, fuh attemtin's tuh edjeecate the iggerent. ;)

EDIT: Can't be arsed explaining it. :P
 

Money, Banking and the Fed

Yo'ur quite w'come ma good friend. Sad fact is most people don't know, don't care and can't be bothered with "economic stuff" because of the illusion that it doesn't affect them individually. But that will change.

Keep smiling.

Cary
 

Money, Banking and the Fed

Originally posted by StarLord@Aug 16 2004, 05:20 PM
A question my friend if I may, what would you invest in knowing what you know?
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I'm prevented from giving specific investment advice given my regulatory constraints. If I were the average guy on the streets, I'd be looking into "bear" funds. Rydex and ProFunds are the biggest fund complexes that have these kinds of funds. Use them with caution. Surprising rallies within bear markets are common. If you want to see what a "waterfall decline" looks like go to http://www.stockcharts.com and play around with the major stock indicies to find a place to invest in "bear" funds. We're probably a few weeks away from a confirmation of the return of the bear. If you'd like more commentary than that, please feel free to ask. I'll tell you what I can. If you had invested in a "bear" fund that correlates to the NASDAQ 100 in mid-March 2000 and gotten out at the bottom in October 2002, you would have made about 75% return, while your neighbors were getting their financial heads handed to them. The timing of such a move is near impossible because of human emotions and the "herding impulse" that drive markets up and down. Buy and read Prechter's book "Conquer the Crash" to get an idea of where we are and where we're headed. There are also 200% bear funds available from both of these fund families which double your gains or losses depending on the movement of the correlated index. Be doubly cautious with these funds. The best asset in a deflationary depression that preserves wealth and improves purchasing power without worrying about timing the stock market is cash. Hope this helps, but you will have to do some homework here.

Cary
 
Money, Banking and the Fed

Thanks for all of this education, Cary. Can you explain in lay terms what happens to personal debt when the economy tips over? In the Great Depression, all of the mortgages were wiped out and homes were foreclosed everywhere. Is this dependent primarily upon employment or banking?
 
Money, Banking and the Fed

Originally posted by Paul J. Lyon@Aug 17 2004, 10:51 AM
Thanks for all of this education, Cary. Can you explain in lay terms what happens to personal debt when the economy tips over? In the Great Depression, all of the mortgages were wiped out and homes were foreclosed everywhere. Is this dependent primarily upon employment or banking?
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Personal debt is about the worst thing you can have during a deflationary depression. Even though the dollar amount of debt doesn't change, the value of those "debt dollars" rises. Cash becomes king and appreciates in value. Again, the number of dollars held don't have to change. The amount of goods and services that same number of dollars will buy goes up in multiples against different asset classes. Those who had cash in the depression of the 30's were able to be all kinds of assets for pennies on the dollar. Those with debt got crushed.

Debt gets repaid voluntarily through repayment, or involuntarily through repudiation (foreclosure, reposession, etc.) A contraction or shrinking of the money supply and credit are what causes a deflationary depression. Lower prices across all assets classes (stocks, bond, real estate, precious metals, collectibles, commoditites, etc.) is caused by asset holders selling at any price in order to raise cash and repay debt, or pay for living expenses in the event of job/income loss. Sellers flood the market where there are few buyers. Creditors get hurt because of massive defaults and reposessions. Reposessed assets lose value as inventories of repo'd cars, houses, etc. grow, and again there are very few buyers. The mind numbing levels of debt in this country and near historic low savings rate are the perfect ingredients for a credit and liquidity crunch. Both debtors and creditors will get hurt, some very badly. Neither a lender nor a borrower be is appropriate.

This process usually begin "at the margins" - financial world lingo for at the edges of the financial system. There have already been a number of bank crises in Russia, India and Costa Rico, and a mutual fund redemption crisis in Taiwan. These are considered fringe economies. These have all happened since early June, and appear to be accelerating. Central banks have stepped in during each of these events and calmed everybody down for now. They've apparently taken lessons from easy Al Greenspan - print more currency and offer soothing words to the masses. So the process has begun at the fringes. The world's economy and financial system are more intertwined and inter-dependent now than ever before. It's only a matter of time before these events start showing up on the shores of the more established economies.

A "systemic financial dislocation" (financial system crash) is a distinct possibility. The derivatives market is pushing $300 Trillion. The global economy produces about $36 Trillion per year. Talk about leverage, huh? Some of the biggest derivatives players, according to the Bureau of International Settlements (BIS), are the major money center banks (Citibank, Bank of America, J.P. Morgan, Goldman Sachs, Bank One, Wachovia, etc.) and the GSE's (govt. sponsored enterprises) Fannie Mae and Freddie Mac. My guess is there will be a melt down in the derivatives market. Fannie and Freddie should be the first to blow up, because they're so thinly capitalized (about $20 billion of equity, with assets and liabilities over $1 Trillion - about 50 to 1 leverage) and they are both big derivatives players. Neither firm shows their derivatives positions on their financial statements (neither do the banks) because they are "off balance sheet" items until they are closed - completed for a gain or loss. You remember "off balance sheet" items before right? Can anyone spell Enron? One way to keep these derivative positions off balance sheet is to keep rolling them over with greater leverage. Last estimate I saw for the GSE's derivatives exposure was in the tens of Trillions of dollars. Financial Chernobyl waiting to happen in my book.

As the economy slows, and unemployment goes up, defaults start to rise. We've had three years in a row of new all time high record personal bankruptcy filings (2001 through 2003), and this year may be on track to make it four in a row. 2005 and 2006 should set even higher bankruptcy records.

The unemployment picture is actually much worse than govt. reports. In fact, a truer reading of unemployment in the Bureau of Labor Statistics report (official govt. unemployment report) shows that total unemployed by their estimates is closer to 10% rather than the official 5.5% rate. How can this be? There are a number of things that will have a person not "counted" as unemployed, even though they are in actuality unemployed. If you've never had a job, but have entered the labor force and can't find a job, you're not counted. If you haven't looked for a job in 4 weeks, you're not counted. If you've run out of unemployment benefits, you're not counted. If you get a part-time or temporary job to make ends meet for a short period, you're not counted. The BLS report is about as manipulated as any govt. report on the economy, but that's another long ass post. Jobs being created by the economy are also being shown to pay less than jobs lost by the longer term employed. Something like 53% of those who lost jobs in 2002 - 2003 that they had held for three years or more (definition of longer term employed) and have been able to find a job by the first quarter of 2004, were making on average 20% less than their old job. Sorry for the rant on unemployment, but it was necessary to make the next point.

A credit crunch is coming, which sparks a simultaneous money/liquidity crunch. The credit crunch is coming because of the massive debts piled up by the American economy over the last four years at the encouragement of the Fed. Wages are falling, unemployment is going up, debt is being repudiated rather than being paid back. This all smacks of deflation. Watch the price of gold. It is the best barometer for signs of inflation/deflation. Inflation/deflation tends to cycle in long waves or periods. We've come from a long period of high inflation in the 1970's and early 80's to disinflation (decreasing rates of inflation) through the 1980's and 90's. We are now facing deflation, and signs of it are starting to pop up. Greenspan will probably not be able to raise rates again for quite a while. His next move might be to cut interest rates again after the election or 2005. That will tear the scab off of the economic wound that has been festering throughout all of the historic fiscal stimulus (tax cuts and excess spending by the fed. govt.) and monetary stimulus (cutting interest rates to a 46 yr. low "emergency" level, and liquidity pumping by the Fed. Reserve). The stimulus is wearing off. Despite the Fed. Resereves massive liquidity pumping, measures of money supply (M1, M2, and M3) have been flat since mid-May, and have begun to shrink in the last two weeks. The Fed can huff and puff all it wants to. Once the forces of deflation take over, it will be too late. Look at the Japanese and their 14 yr. slow motion crash.

I hope this made sense, and answered your question. Bankruptcy, foreclosures and criminal law would be good places to expand your legal practice. Bankruptcies and foreclosures will be way up, and crime goes up with hard economic times. Also more "white collar" and political crimes get exposed in economic downturns. Sorry for the long ass post, but the background is necessary for the conclusions to make sense. I highly encourage you to get and read a copy of Bob Prechter's "Conquer the Crash" to get a better explanation of where we've come from and where we're headed. The updated 2004 version is available online.

Cary
 
Money, Banking and the Fed

As crime goes up, the government uses it as leverage to further erode Constitutional rights. My job is secure; I'm in a boom industry, but it sounds like all the other industries are going to implode. There will be an endless line of defendants requiring an attorney, until the government eliminates the right to counsel.

Thank you for the response. It sounds like the elements are so completely interdependent that you can't fix any part of it, only shift the pain. Also, when the foreclosures start, there will be hundreds of thousands of homeless unemployed. In the 1930s, many of these went to live with relatives, and there was an enormous shift of population to big cities. It doesn't seem like we have the same kind of family institutions nowadays.

Other wise investments: privatized prison corporations, security services, iron bars for windows. Weaponry. Rice, beans, and coffee.
 
Money, Banking and the Fed

Originally posted by Paul J. Lyon@Aug 17 2004, 03:08 PM
As crime goes up, the government uses it as leverage to further erode Constitutional rights. My job is secure; I'm in a boom industry, but it sounds like all the other industries are going to implode. There will be an endless line of defendants requiring an attorney, until the government eliminates the right to counsel.

Thank you for the response. It sounds like the elements are so completely interdependent that you can't fix any part of it, only shift the pain. Also, when the foreclosures start, there will be hundreds of thousands of homeless unemployed. In the 1930s, many of these went to live with relatives, and there was an enormous shift of population to big cities. It doesn't seem like we have the same kind of family institutions nowadays.

Other wise investments: privatized prison corporations, security services, iron bars for windows. Weaponry. Rice, beans, and coffee.
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You're right on point my brother.

Cary
 
Money, Banking and the Fed

I've copied an article written by Stephen Roach, chief global economist for Morgan Stanley Dean Witter. Mr. Roach's analysis IMO is dead on accurate. The article Twin Deficits at the Flashpoint? details the financial perils/risks of running massive trade and budget deficits. The US has been borrowing about $1 Trillion + per year now for at least two years. Such spendthrift ways never end mildly. When a major Wall Street firm starts warning of impending danger from the debt bubble, it's best to pay attention. Wall Street tends to stay on the "happy" side of the street. Here's the article.

Global: Twin Deficits at the Flashpoint?

Stephen Roach (New York)


June?s enormous US trade deficit should be a wake-up call to America and the rest of the world. It is a direct manifestation of a lopsided global economy that remains biased toward unprecedented external imbalances. As long as the US continues to live well beyond its means and as long as the rest of the world fails to live up to its means, this seemingly chronic condition will only get worse. The imperatives of global rebalancing are reaching a flashpoint.

America?s record $55.8 billion trade deficit in June was a shocker. Annualized, it is equivalent to a $670 billion shortfall, or 5.75% of nominal GDP. Nor can this deterioration be explained away by surging oil prices. Excluding petroleum products, the trade deficit for goods still widened by $2.7 billion in June -- an enormous swing by any standards. The plain fact of the matter is that America has never come close to running such an outsize external deficit before. By way of comparison, the last time the US had a ?foreign trade problem? was in the latter half of the 1980s; back then, the trade deficit (as measured on a national income accounts basis) peaked out at 3.2% of GDP in the second quarter of 1987. Needless to say, that was not the most tranquil of times in financial markets. As America?s external imbalance widened in mid-1987, the dollar came under sharp downward pressure and US interest rates were pushed higher. Those were the classic manifestations of a current account adjustment that many (myself included) believe were at the heart of the stock market crash of October 1987. Today?s external imbalances dwarf those of 17 years ago.

It?s easy to point the finger at others in diagnosing the problem. In the political season, the blame game always intensifies. US Treasury Secretary John Snow blames it on new weakness in the global economy. The Democrats tie America?s trade and jobs problems to the pressures of outsourcing and unfair foreign competition. As usual, there are some elements of truth in both explanations. The global economy does, in fact, appear to be sputtering. Goods exports plunged by 5.9% in June (in real terms), the largest monthly decline on record. While month-to-month fluctuations can never be taken too seriously, I don?t think it?s a coincidence that such a sharp decline in overseas shipments of American made goods occurred as slowdowns became increasingly evident in China and Japan and sluggishness persisted in Europe. On the other side of the trade ledger, renewed sluggishness on the US job front and a 1.8% surge in non-petroleum imports in June (sequential monthly rate) certainly speak to the unrelenting pressures of foreign penetration into US markets.

Yet this finger pointing misses the basic problem -- that of a saving-short US economy that is locked into the destructive spiral of ever-widening twin deficits. Lost in all the shuffle was the latest monthly update on that ?other deficit? -- a $69.2 billion shortfall in the July federal budget deficit reported last week by the US Treasury. Not only was that about $7 billion worse than expected, but it puts America easily on track to break the $400 billion threshold on the budget deficit for the first time ever. While America?s budget deficit has been larger as a share of GDP -- the estimated 3.6% gap in the current fiscal year falls well short of the 6% peak hit in 1983 -- the sheer volume of financing is obviously of critical importance for the capital markets. Nor has the US ever experienced such a massive turnaround in its budget position -- with the deficit for the current fiscal year representing a swing of 7% of GDP relative to the 2.4% budget surplus recorded in 2000.

Moreover, there?s another key aspect of this problem: Unlike the deficits of the 1980s, America is lacking in any backstop in private saving. Net of depreciation, the private saving rate of households and businesses, combined, stood at just 4.5% of national income in 2003; that?s only a little more than half the 8.3% average recorded in the latter half of the 1980s -- the last time the US had a deficit problem. In addition, the personal saving rate fell back to just 1.2% in June 2004 -- underscoring the asset-dependent US consumer?s seemingly chronic aversion to income-based saving. This deficiency of private saving means that outsize government budget deficits are now putting a greater strain on the US economy and financial markets than was the case during the latter half of the 1980s.

This lack of saving, in my view, is America?s most vexing problem. Adding in government deficits, the net national saving rate -- the combined saving of households, businesses, and the government sector adjusted for deprecation -- has averaged only about 3% since 2000. By way of comparison, the net national saving rate averaged nearly 10% in the 1960s and 1970s before falling to 5.9% in the 1980s and 4.8% in the 1990s. Lacking in domestic saving, the United States has no other choice than to import foreign saving from abroad -- and run massive current-account and trade deficits to attract that capital. To the extent that the extraordinary deterioration in the federal budget has been the main culprit in pushing down America?s domestic saving rate in recent years, the two deficits are joined at the hip. Without a cushion of private saving, a long-term structural budget deficit problem -- precisely the outcome the US now faces, according to the non-partisan Congressional Budget Office -- spells unrelenting pressures from America?s twin deficits for as far as the eye can see.

This is not a message that plays well in Washington. Believe me, I know that -- having testified many times in front of the US Congress on one of these deficits or another. Politicians, in their never-ending search for both the scapegoat and the quick fix, are hardly predisposed to looking in the mirror and accept any blame for the recent deterioration in national saving and the current-account and trade deficits it spawns. Pete Peterson makes that same point eloquently in his latest book, Running on Empty (Farrar, Straus and Giroux, 2004). The subtitle of this tome says it all: Both the ?Democratic and Republican Parties are Bankrupting Our Future.? I couldn?t agree more -- especially with the ever-ticking demographic clock calling out for an increase in national saving at precisely the time when America is going the other way. Yet deficit reduction never sells on the campaign circuit, regardless of the mounting perils of a saving-short economy. Campaign 2004 is no different in that respect. Senator Kerry and President Bush are arguing more over the types of additional tax cuts America needs rather than debating the imperatives and tactics of deficit reduction.

Maybe June?s trade deficit is a wake-up call. If so, it will be up to financial markets to send that message. That was the verdict in October 1987 and it may well be the case again. Financial markets have long served the painful but useful purpose of venting imbalances in the real economy. No two such episodes are alike, however. Just because the tensions of America?s twin deficits in 1987 were vented in equity markets doesn?t mean the same such phenomenon will necessarily occur in 2004. Other asset markets could just as easily give way -- the dollar, the bond market, credit markets, or even property. Nor is the recent slide in the US equity market inconsistent with the outcome that might be expected in a more full-blown current account adjustment.

The point is that a chronic twin-deficit problem in a saving-short US economy requires ever greater volumes of capital inflows into dollar-denominated assets in order to finance ongoing growth in the domestic economy. As the current-account gap -- the broadest measure of international transactions -- rises toward 6% of GDP, America will need to import in excess of $2 billion in foreign capital each and every business day of the year. Up until now, that financing has occurred on terms that are very favorable to the United States -- there has been only a limited decline in the broad dollar index and virtually no increase in real long-term interest rates. In the end, however, a chronic shortfall of national saving cannot be financed indefinitely without consequences. Barring a sudden improvement in the national saving outlook, underlying asset values in the United States must be written down to match the ensuing reduction in this saving-short economy?s intrinsic growth potential. That?s where pressures on asset prices come into play.

Never before has the world?s dominant economic power lived this far beyond its means. Most believe that America is special -- that it deserves special dispensation from current account, debt, and saving adjustments. Just as history is littered with the remnants of other such new paradigms, I continue to believe that the United States will have to pay a steep price for its imbalances. As America?s twin deficits move inexorably toward the flashpoint, there is a growing risk that its external financing terms could take a sudden turn for the worse. The dollar, US equities, and credit markets strike me as most vulnerable to such a development.
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Bold highlights are mine. September and October are usually the "cruel" months for the stock market.

Cary
 

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