Why our generation is screwed, in easy to understand pictures

http://research.stlouisfed.org/fred2/series/BOGNONBR

http://research.stlouisfed.org/fred2/series/borrow

Goodbye

apparently, your first graph is misleading.
http://calculatedrisk.blogspot.com/2008/05/non-borrowed-reserves-and-feds-balance.html
so, its bad, but apparently not as bad as stated?

I just happened across this before I posted here. funny, huh?

Where's Obi-Ron Paul when you need him?

Not even funny anymore. I just got out of a pretty heated discussion with a person on my truck forum that fully intends on supporting Ron Paul at the polls in November.

I tried to explain to him that unless he changes parties, there will be no Ron Paul at the November Election. There can only be one Republican Nominee and it looks like McBain has that all wrapped up. He continued to argue with me.

bean: The second graph starts at 1913. When the FED began. No historical context?

attn ho: How can the TAF and the PDCF be anything other then borrowed reserves? I was actually aware the FED had committed half their assets to fight the credit crisis.

The basic point of these graphs is people still don't realize how radical the FED's actions have been over the past year. Inflationary effects take time to manifest in prices. The price increases we are seeing now are from the FED's action in FALL. (discounting other factors). The true inflationary consequences of the Bernacke FED will be realized probably sometime around September, if general inflation trends hold up.

Devilsreject: He can write him in, and probably will.

and the reason the chart is making its rounds on the internet is because it was a recently released study by the federal reserve bank of St. Louis.

And because Libertarians need an "I told you so" talking point.

Well having established here that you have poor reading comprehension skills in this thread you lack the ability to perform a basic internet search.

A Fed press release from 2007-12-12

From a Wall Street Journal blog

From Bloomberg "How Non-Borrowed Reserves Became a Sexy Subject: Caroline Baum" (link).

Meet Mister Google he is really, really nice and will help you do research.

Here is a simple search for Non-Borrowed Reserves of Depository Institutions search.

Would "John Galt " be as intellectually lazy as you seem to be?

My point stands. The TAF is basically guaranteeing the fractional reserve through FED loans. I think this is a horrible idea.

It's not my reading comprehension here, it's my interpretation of the info. Frankly, I think the sites you have sourced are trying to put an overly positive spin on it. Yes, the Reserves changing are a direct result of the FED's actions. And that was my whole point in displaying the graphs. They are essentially creating this massive infllow of liquidity. The graph shows you just how massive, in perspective. And there will be inflationary consequences to this in the near future.

What you fail to understand IDGAS, (since I admittedly didn't explain) was the point of the graphs is not to demonstrate an impending bank crisis. The crisis happened. It's over. The solution: The FED's new direct lending power. The point of the graph was to show HOW MUCH liquidity the FED had really injected. Keep in mind, that huge spike doesn't mean actual wealth. It is the extent to which the national banking system (and concordantly all of our econmic activity) is now backed by future debt., (which will cause a rise of prices, but in a disorderly way.)

How the fuck am I supposed to get student loans, now!?

You can get them. But I wouldn't recommend it. Especially since student loan debt is one of the sources of collateral the FED now wants to use.

Canada looks better with every passing month.

Suck up to your parents.

Oh boy; the uninformed make my head hurt - enough of the "Red Ink Kills Currencies" crap. Today, Atlas cries.

Uninformed economic forecasters are like a cross-eyed javelin throwers; they don't win accuracy contests, but they demand your attention for all the wrong reasons.

We've been through this a hundred times. We live in a debt-based economy, without which there would be no economic growth. Money in the banking system in the form of debt versus cash (M3 vs M0, M1, and M2) has been above 80% for the last 45 years and has steadily increased since the early 1900's. Money supply does have an effect on the economy, but largely debt as a percentage of money has had limited effect. Default on debt - mostly through overvalued assets moving through the bank value chain will have an impact on the economy. Note however, that most financial institutions that take deposits and issue credit as "banks" are publicly traded and federally (or local government) regulated companies whose assets must be revalued as market conditions evolve. By most estimates, the financial industry has written off 80% of the bad asset (disguised as bad debt). In other words, the worst part is past. Fed guarantees, which move up and down more than any of us cares to watch, has increased, but not dangerously so.

What has increased is the Fed's hand on the joystick of interest rates. Instead of allowing interest rates to work at the free hand of the market, the Fed intervenes to "modulate" risk and reward. Ayn Rand would object, but she wrote novels, not money policy. Modulating interest rates theoretically, helps manage the growth or recession of an economy by making money used to make purchases easier or more difficult. Without intervention, your credit card rates in difficult times could surpass 30%, making it impossible for you - or anyone with much more favorable terms - to service their debt. And unless you are stupid, you will understand that growth cannot occur without debt. Modulating interest rates is a good thing, albeit a dangerous thing, it is better than the alternative, which looks a lot like the 777 that lost its engines on approach to Heathrow - it falls to the ground rather abruptly.

BTW - I use the term moderation without issuing support for Bernake and his use of the term.

The rules for measuring deposit performance, which is really the crux of the issue being discussed here, began changing over 5 years ago. I remind you that today, unlike any period in history, nearly all of the world money "on deposit" is moving in totality nearly every week as it searches for returns in global markets. That is to say, every single dollar, euro, etc. (M3), is changing hands every week in search of performance that outpaces costs and inflation. Think of something like $54 to 56 Trillion (including China estimates) changing hands weekly..

I would personally challenge your contention that growth is impossible without debt. In fact, there are counterexamples. Expansion of GDP based on debt has obviously occurred, but to say that it can't occur any other way is ridiculous. Also, in my personal opinion, I am not oppossed to debt per ce as an economic driver, I am oppossed to a government imposed monopoly of fiat currency.

Adroit, I would ask you though, do you think the FED's actions in the past year are unprecedented since the collapse of bretton-woods, or are you contending that they are just part of your normal Keynesian correction?

Slice - I'm an investment banker. My firm specializes in M&A work and capital formation. There is very little you can offer me as sound reasoning to suggest that anything but extremely modest high-risk growth is possible without debt. In fact, debt (corporate, personal, and governmental) has been the foundation for most growth since before the invention of money. The inside joke here for you, should you get it, is to point out that long before someone decided that a precious commodity should be used to forge trade, people figured out the importance of debt. You would not be sitting there on your John Galt throne typing words into the vast reaches of the Interwebs without debt to finance the building of the infrastructure you so painstakingly abuse.

Bretton-Woods was created post WWII, largely based on three facts:
- The world economy was largely controlled by a very limited number of nation's who desired to continue their economic expansion on their terms
- Those same nations had just shared the tragedies of the great depression on somewhat similar scale and therefore could create a shared vision of the desired outcome; avoid the catastrophe of the past
- Much of the world, including great expanses of Europe and Indochina required rebuilding following the depression and WWII and the participating nations required a common platform from which to lend, borrow, and trust one another in those efforts. Even the US required a form of sanguine environment on which to rely upon to rebuild its own economy.

Now, how many of the characteristics that led to Bretton-Woods continue to be relevant today?
- The world economy is now truly a global economy and the rules for participation are evolving very quickly. No single nation, economy, or currency enjoys the influence or control that was available post WWII. Get over it. Investments continue to pursue the best return without regard for borders, politics, or currency. We now compete with those we once had shared vision and often times we are competing for valuable finite natural resources like oil or water.
- Global interdependency continues, but it's not the old model of as falls Wichita so falls Wichita Falls. The German economy will not collapse if the US economy stalls. Individual economies are developing resiliency that has to some extent caught US policy makers flatfooted - which is more pronounced these past 7 years.
- Most nations have abandoned efforts to rebuild or build lesser nations, turning their attentions to their own needs because the demand to retain older infrastructures is too costly. The same challenges faced by Europe in the 20 century have become North American challenges in the 21st century. Sixty years ago, we would not invade a country to establish a military presence to secure our access to precious economic commodity. Sixty years ago, we would have gone to Darfur, or Palestine, or other needy country to help fund and build their healthy participation in the global community because we saw it as both a moral obligation and one that would yield economic benefit. No time or money for that effort today - nations are focused on taking care of numero uno.

One more point - the competition for money is higher today than at any time in our history. The chaos of today's economy, combined with the human desire to prepare for the future is driving investment that is more speculative; for higher returns and for some guarantee of continuing one's economic viability.

Bretton-Woods hasn't been viable since the late 60's.

In short - the rules have changed and we must all adapt while attempting to avoid a crisis level adjustment. I think the Fed has fumbled the effort a few times, but I am thankful that they have not buried their head in an Ayn Rand writing and pretended to let the free hand of the market determine the outcome no matter the cost (although Greenspan can be accused of some obvious lust for Ayn.) Intervention is a necessary evil at this stage and we will not always get it right.

(edited to correct stupid spelling errors)

Not really on-topic necessarily, but is it not apparent that one's opinion might be taken slightly more seriously if they eschew features such as unneeded capitalization?

I'm trying to figure out the acronym: Federal Enticement Department? Federal Executive Decisions? Federal Economic Decrepitude?

Short version: It's absolutely acceptable, and probably even more "correct," just to say "Fed" or "the Fed." I know Doc Paul's Savage Supporters like throwing the phrase "the Fed" around to refer to the Federal Government, but when you come down from the artificial moon-base of Doc Paul to talk to us mere mortals, remember that you have to speak to our naturally lower level of understanding.

*snicker*

I'd be interested to see your counterexamples. Links would be appreciated.

Hi. First off, as far as the examples, it of course depends how you define debt free. If any business that inherently uses fiat currency is off the table, then there aren't modern examples, (except for Somalia and a few others) Historically, of course, many cultures saw economic growth without any kind of sophisticated financial system. These tended to be more sustainable, since they stopped growing once they reached a relative equilibrium with their environment. The native cultures of the americas would be a good example of this.

I am a personally of the opinion that perpetual growth is not necessarily a good thing, as it ignores the reality of ecological factors (and requires rather nasty malthusian corrections from time to time.)

On a basic level, money, whatever form it takes, is information technology. It is not so much debt per ce that is required for society to flourish, but trust. As a really basic and extreme example, let's say I have some business to attend to in ohio, but I don't have a car. If i asked to borrow someone's car, they would probably say no. Even if I argued that what I intended to do with the car was really a great beneficial thing, he would probably still say no. However, if I had, say, a million dollars that I was willing to exchange for the car, he would gladly give me the car. Now, on the surface level, this is a strange thing. Paper, or a shiny rock, or whatever, is not more valuable then the car. But money is a useful technology, because people assume (correctly) that is an accurate predictor of the realtive value of a resource. Because of money, people have a means by which to decide what the best way is to utilize their resources.

The value of a resource is set by an enormous set of exchanges that sets a numerical value for a particular resource over time. So people have some way to determine what kin of co-operation is likely to be of a mutual benefit, and what will not be.

When money is created, it adds the perception of increased value to a particular asset or enterprise. This stimulates economic activity, and over the short term, is a good thing, because co-operation and trust yield more frutiful results then non-co-operation and suspicion. Over time however, because the information value of created money is perturbative, the small inaccuracies in the value judgements of resource allocation add up. It is chaos, mathematically speaking. Once the swing of the information values become apparent, the trust rescinds, and the bust phase of the cycle begins (which as you know, being an investment banker, is as a rule deflationary). This is the necessary correction for the systemic perturbations.

Now, here's my point about the creation (and monopolization) of money as debt. Money backed by debt requires an ever expanding tax base to keep the system stable. However, inherent to the nature of money creation is the keynesian boom and bust cycle (chaotic perturbation and its necessary correction.) Since maintenance of growth is a necessity to keep the debt expansion and the tax base in line, no full correction is ever allowed. Rather, there is more money creation to begin the expansive phase again. As this goes on, the information accuracy of the money becomes increasingly corrupted. I think, a great example of this, is energy. You have an entire nation's infrastructure developed around the illusion of cheap and plentiful energy. Since ecological reality requires constant technological innovation to make constant growth sustainable, it seems apparent to me that the current financial model only prolonges a painful correction as long as there are ways around the basic problem, that resources can be used ever more efficiently by new technologies.

I am not arguing for a return to Bretton woods, as I think that system clearly had its inherent flaws, but I do think the end of the currency monopoly would at least provide a real check to this sort of short sighted inflation. If there were alternative currencies that perhaps competed better, as far as information value goes, they could at least serve as a cushion from the perturbations of the government currency. I also don't see the moral justification for not at least allowing this to develop without the threat of state violence.

By the way, my point in mentioning bretton woods was I think the Fed's (that's federal reserve for anyone who doesn't know what I'm talking about) innovations over the past year are the most significant financial restructuring since the collapse of bretton woods, and I wanted your opinion on that.

I'm sure you heard Volcker's testimony about the need for an expanded fed. What do you think about that, and do you believe there is ever a need to draw a line in the sand when it comes to mission creep? It seems to me that this is the classic interventionist dilemma. Once the cat is out of the bag, failing to move forward at any step is disastrous.

FYI, I don't worship at the alter of Rand, and I don't agree with alot of what she has to say.