Hedge fund pro and short seller Jim Chanos believes that China’s overbuilding and overdependence on new real estate, when the demand isn’t there, will cause the nation to eventually “hit a wall.”
CNBC: “The problem is that consumption as a percentage of Chinese economy has declined in the last 10 years, from 40 to 35%. It’s all real estate,” Chanos said.
source
Saturday, December 11, 2010
Friday, September 3, 2010
The Anglo-Saxon Disease
The Yanks (Americans) have it. The "Brits" got it. EVen the Aussies "Down Under" caught it. Not, for most part, the Canadians. But the Japanese, the "Englishmen" (or at least islanders) of Asia had their own version. It was the Anglo- Saxon disease.
It started with property price risess in the above countries, that in turn were the result of loose global monetary policies. Property created a boom in its own industry, and a collateral boom in financing by consumers, who borrowed on rising property values to finance other consumption. These twin bubbles but the banks and lending companies at risk. Things got so bad that governments finally had to step in to bailout fhe financial insitutions. When this happened the problems of a sector became everybody's problem.
The property bubble affected Eastern Europe as well as Southeast Asia. But at its core, it seemed to have a partiuclar hold in Anglo-Saxon countries, which had a stronger notion of property rights than others. But property values run amok are like any other disease. Countries that live by property may also die by property.
source
It started with property price risess in the above countries, that in turn were the result of loose global monetary policies. Property created a boom in its own industry, and a collateral boom in financing by consumers, who borrowed on rising property values to finance other consumption. These twin bubbles but the banks and lending companies at risk. Things got so bad that governments finally had to step in to bailout fhe financial insitutions. When this happened the problems of a sector became everybody's problem.
The property bubble affected Eastern Europe as well as Southeast Asia. But at its core, it seemed to have a partiuclar hold in Anglo-Saxon countries, which had a stronger notion of property rights than others. But property values run amok are like any other disease. Countries that live by property may also die by property.
source
Sunday, August 29, 2010
Tony Robbins Is Warning That An Economic Collapse Is Coming
It seems like almost everyone is warning of a coming economic collapse these days. Do you remember Tony Robbins? He is probably the world's best known "motivational speaker" and his infomercials dominated late night television during the 80s and 90s. He was always urging all of us to "unleash the power within" and to take charge of our lives. Well guess what? Now Tony Robbins is warning that an economic collapse is coming.
In fact, he has issued a special video warning about what he believes is about to happen. Considering the incredible connections that he has at the highest levels of the financial world, it makes a lot of sense to consider what he is trying to warn us about. Robbins says that a "major retracement" is coming to financial markets and that the coming collapse is going to be a "painful process" as we go through it. Those familiar with Tony Robbins know that he always goes out of his way to stress the positive, so if even he is openly warning the public about a coming economic nightmare than you know that things are starting to get really, really bad out there.
The video that Tony Robbins published where he gives his economic warning is posted in two parts below. This is unlike any Tony Robbins video that you have ever seen before and it is absolutely jaw dropping....
Part 1:
Part 2:
So is Tony Robbins right about what is coming?
Yup.
An economic collapse is coming.
You need to get prepared.
For those not familiar with my previous articles, let's review just some of the reasons why America is headed towards an economic nightmare of unprecedented proportions....
The National Debt - The U.S. government has accumulated a national debt that is rapidly approaching the 14 trillion dollar mark. According to Democrat Erskine Bowles, one of the heads of Barack Obama's national debt commission, if we continue on the path we are on the U.S. government will be spending $2 trillion just for interest on the national debt by 2020.
State And Local Debt - Many of America's state and local governments may be in even worse financial shape than the federal government is. In fact, some state and local governments are in such a financial mess that they have starting cutting off even the most essential services.
Consumer Debt - The total amount of consumer debt that Americans have accumulated now stands at approximately 11.7 trillion dollars.
The Trade Deficit - The U.S. trade deficit has exploded to nightmarish proportions over the past two decades. Every single month tens of billions more dollars flows out of the country than flows into it. The rest of the world is literally bleeding us dry in slow motion.
No Jobs - Today it takes the average unemployed American over 8 months to find a job. The number of Americans receiving long-term unemployment benefits has risen over 60 percent in just the past year.
The Credit Crunch - The U.S. is experiencing a credit crunch unlike anything it has seen since the Great Depression. Lending has really, really dried up, but without loans our economic system cannot function properly.
The Housing Crisis - Even with mortgage rates at historic lows, a shockingly low number of Americans are buying houses. There has been a total collapse in home sales since the home buyer tax credit expired. At the same time, mortgage defaults, foreclosures and home repossessions by banks continue to set new all-time records.
Rising Bankruptcies - Nationwide, bankruptcy filings rose 20 percent in the 12-month period ending June 30th.
Rising Poverty - One out of every eight Americans and one out of every four American children are now on food stamps. Approximately 50 million Americans couldn't even afford to buy enough food to stay healthy at some point last year.
The Coming Pension Crisis - America is facing a pension crisis that is so nightmarish that it is almost impossible to adequately describe it. State and local government pension plans are woefully underfunded, dozens of large corporate pension plans either have collapsed or are on the verge of collapsing, Social Security is a complete and total financial disaster and about half of all Americans essentially have nothing saved up for retirement.
The Derivatives Bubble - Our financial system has become a gigantic gambling parlor and we have allowed a horrific derivatives bubble to develop that could destroy the entire world economy if it ever bursts. Nobody knows exactly how big the derivatives bubble is, but low estimates place it at around 600 trillion dollars and high estimates put it at around 1.5 quadrilliondollars. Once that bubble pops there simply will not be enough money in the entire world to fix it.
The Federal Reserve - The Federal Reserve has devalued the U.S. dollar by over 95 percent since 1913 and it has been used to create the biggest mountain of government debt in the history of the world. There are many economists who would argue that the Federal Reserve is at the very core of our economic problems.
As we get even closer to the economic abyss that we are racing towards, even more big names such as Tony Robbins will come forward with warnings.
The truth is that these problems did not develop overnight, and they are not going to be solved overnight either.
Perhaps our economic future is best summed up by this one statement that economist Paul Krugman recently made....
"America is now on the unlit, unpaved road to nowhere."
It would be great if I could write about America's bright economic future and the unlimited prosperity that is ahead for all of us, but that would be a lie.
We are headed for an economic collapse.
It is going to be painful.
It is time to get prepared.
http://www.infowars.com/tony-robbins-warns-economic-collapse-is-coming/
In fact, he has issued a special video warning about what he believes is about to happen. Considering the incredible connections that he has at the highest levels of the financial world, it makes a lot of sense to consider what he is trying to warn us about. Robbins says that a "major retracement" is coming to financial markets and that the coming collapse is going to be a "painful process" as we go through it. Those familiar with Tony Robbins know that he always goes out of his way to stress the positive, so if even he is openly warning the public about a coming economic nightmare than you know that things are starting to get really, really bad out there.
The video that Tony Robbins published where he gives his economic warning is posted in two parts below. This is unlike any Tony Robbins video that you have ever seen before and it is absolutely jaw dropping....
Part 1:
Part 2:
So is Tony Robbins right about what is coming?
Yup.
An economic collapse is coming.
You need to get prepared.
For those not familiar with my previous articles, let's review just some of the reasons why America is headed towards an economic nightmare of unprecedented proportions....
The National Debt - The U.S. government has accumulated a national debt that is rapidly approaching the 14 trillion dollar mark. According to Democrat Erskine Bowles, one of the heads of Barack Obama's national debt commission, if we continue on the path we are on the U.S. government will be spending $2 trillion just for interest on the national debt by 2020.
State And Local Debt - Many of America's state and local governments may be in even worse financial shape than the federal government is. In fact, some state and local governments are in such a financial mess that they have starting cutting off even the most essential services.
Consumer Debt - The total amount of consumer debt that Americans have accumulated now stands at approximately 11.7 trillion dollars.
The Trade Deficit - The U.S. trade deficit has exploded to nightmarish proportions over the past two decades. Every single month tens of billions more dollars flows out of the country than flows into it. The rest of the world is literally bleeding us dry in slow motion.
No Jobs - Today it takes the average unemployed American over 8 months to find a job. The number of Americans receiving long-term unemployment benefits has risen over 60 percent in just the past year.
The Credit Crunch - The U.S. is experiencing a credit crunch unlike anything it has seen since the Great Depression. Lending has really, really dried up, but without loans our economic system cannot function properly.
The Housing Crisis - Even with mortgage rates at historic lows, a shockingly low number of Americans are buying houses. There has been a total collapse in home sales since the home buyer tax credit expired. At the same time, mortgage defaults, foreclosures and home repossessions by banks continue to set new all-time records.
Rising Bankruptcies - Nationwide, bankruptcy filings rose 20 percent in the 12-month period ending June 30th.
Rising Poverty - One out of every eight Americans and one out of every four American children are now on food stamps. Approximately 50 million Americans couldn't even afford to buy enough food to stay healthy at some point last year.
The Coming Pension Crisis - America is facing a pension crisis that is so nightmarish that it is almost impossible to adequately describe it. State and local government pension plans are woefully underfunded, dozens of large corporate pension plans either have collapsed or are on the verge of collapsing, Social Security is a complete and total financial disaster and about half of all Americans essentially have nothing saved up for retirement.
The Derivatives Bubble - Our financial system has become a gigantic gambling parlor and we have allowed a horrific derivatives bubble to develop that could destroy the entire world economy if it ever bursts. Nobody knows exactly how big the derivatives bubble is, but low estimates place it at around 600 trillion dollars and high estimates put it at around 1.5 quadrilliondollars. Once that bubble pops there simply will not be enough money in the entire world to fix it.
The Federal Reserve - The Federal Reserve has devalued the U.S. dollar by over 95 percent since 1913 and it has been used to create the biggest mountain of government debt in the history of the world. There are many economists who would argue that the Federal Reserve is at the very core of our economic problems.
As we get even closer to the economic abyss that we are racing towards, even more big names such as Tony Robbins will come forward with warnings.
The truth is that these problems did not develop overnight, and they are not going to be solved overnight either.
Perhaps our economic future is best summed up by this one statement that economist Paul Krugman recently made....
"America is now on the unlit, unpaved road to nowhere."
It would be great if I could write about America's bright economic future and the unlimited prosperity that is ahead for all of us, but that would be a lie.
We are headed for an economic collapse.
It is going to be painful.
It is time to get prepared.
http://www.infowars.com/tony-robbins-warns-economic-collapse-is-coming/
Tuesday, August 24, 2010
The Six Human Needs
The Six Human Needs
Tony Robbins has identified six basic human needs and believes everyone is—or can be—motivated by their desire to fulfill these needs.
You may want to consider these needs when thinking about developing and delivering products and services to people. The question to ask is, "What need or needs does my product fulfill for my customer?"
1. Certainty/Comfort. We all want comfort. And much of this comfort comes from certainty. Of course there is no ABSOLUTE certainty, but we want certainty the car will start, the water will flow from the tap when we turn it on and the currency we use will hold its value.
2. Variety. At the same time we want certainty, we also crave variety. Paradoxically, there needs to be enough UNcertainty to provide spice and adventure in our lives.
3. Significance. Deep down, we all want to be important. We want our life to have meaning and significance. I can imagine no worse a death than to think my life didn't matter.
4. Connection/Love. It would be hard to argue against the need for love. We want to feel part of a community. We want to be cared for and cared about.
5. Growth. There could be some people who say they don't want to grow, but I think they're simply fearful of doing so—or perhaps NOT doing so. To become better, to improve our skills, to stretch and excel may be more evident in some than others, but it's there.
6. Contribution. The desire to contribute something of value—to help others, to make the world a better place than we found it is in all of us.
Action Point
Evaluate this list to better understand your personal motivations and examine which ones seem the most significant to you. Then, look at what you do to fulfill the needs of others. It will likely make a difference in what and how you do what you do. It also should make a difference in the way you describe and explain what you and your product can do.
Tony Robbins has identified six basic human needs and believes everyone is—or can be—motivated by their desire to fulfill these needs.
You may want to consider these needs when thinking about developing and delivering products and services to people. The question to ask is, "What need or needs does my product fulfill for my customer?"
1. Certainty/Comfort. We all want comfort. And much of this comfort comes from certainty. Of course there is no ABSOLUTE certainty, but we want certainty the car will start, the water will flow from the tap when we turn it on and the currency we use will hold its value.
2. Variety. At the same time we want certainty, we also crave variety. Paradoxically, there needs to be enough UNcertainty to provide spice and adventure in our lives.
3. Significance. Deep down, we all want to be important. We want our life to have meaning and significance. I can imagine no worse a death than to think my life didn't matter.
4. Connection/Love. It would be hard to argue against the need for love. We want to feel part of a community. We want to be cared for and cared about.
5. Growth. There could be some people who say they don't want to grow, but I think they're simply fearful of doing so—or perhaps NOT doing so. To become better, to improve our skills, to stretch and excel may be more evident in some than others, but it's there.
6. Contribution. The desire to contribute something of value—to help others, to make the world a better place than we found it is in all of us.
Action Point
Evaluate this list to better understand your personal motivations and examine which ones seem the most significant to you. Then, look at what you do to fulfill the needs of others. It will likely make a difference in what and how you do what you do. It also should make a difference in the way you describe and explain what you and your product can do.
Sunday, July 11, 2010
PPT—Marc Faber: Mirror, Mirror on the Wall, When is the Next AIG to Fall?
2010 PPT （5mb）
Presented by Marc Faber at "Austrian Economics and the Financial Markets," the Mises Circle in Manhattan on 22 May 2010 in New York, New York. Includes an introduction by Mises Institute president Douglas E. French.
Presented by Marc Faber at "Austrian Economics and the Financial Markets," the Mises Circle in Manhattan on 22 May 2010 in New York, New York. Includes an introduction by Mises Institute president Douglas E. French.
Wednesday, June 23, 2010
Wall Street & FDR –Antony C. Sutton’s trilogy
This book1 portrays Franklin Delano Roosevelt as a Wall Street financier who, during his first term as President of the United States, reflected the objectives of financial elements concentrated in the New York business establishment. Given the long historical association—since the late 18th century—of the Roosevelt and Delano families with New York finance and FDR's own career from 1921 to 1928 as banker and speculator at 120 Broadway and 55 Liberty Street, such a theme should not come as a surprise to the reader.
On the other hand, FDR biographers Schlesinger, Davis, Freidel, and otherwise accurate Roosevelt commentators appear to avoid penetrating very far into the recorded and documented links between New York bankers and FDR. We intend to present the facts of the relationship, as recorded in FDR's letter files. These are new facts only in the sense that they have not previously been published; they are readily available in the archives for research, and consideration of this information suggests a reassessment of FDR's role in the history of the 20th century.
Pdf version(457k)
On the other hand, FDR biographers Schlesinger, Davis, Freidel, and otherwise accurate Roosevelt commentators appear to avoid penetrating very far into the recorded and documented links between New York bankers and FDR. We intend to present the facts of the relationship, as recorded in FDR's letter files. These are new facts only in the sense that they have not previously been published; they are readily available in the archives for research, and consideration of this information suggests a reassessment of FDR's role in the history of the 20th century.
Pdf version(457k)
Criticism of fractional-reserve banking
Wikipedia - 2010 April version
Printable version
THE ORIGINS OF THE FEDERAL RESERVE -- MURRAY N. ROTHBARD (153KB)
The Creature From Jekyll Island (by G. Edward Griffin)
Main article: Fractional-reserve banking
Criticisms of fractional reserve banking have been put forward from a variety of perspectives. Critics have included mainstream economists such as Irving Fisher,[1] Frank Knight[2] and Milton Friedman.[3] However, few if any mainstream economists now endorse such views.[citation needed] Within the economics profession, most criticisms are based upon non-mainstream economic theories such as those of the Austrian School. There are also critics from outside the economics profession who advocate a full reserve banking system.
Contents
* 1 Terminology
* 2 Typical criticisms
2.1 Non-mainstream views
* 3 Basic debate
* 4 Basic nature of system
* 5 Other economic and political criticisms
5.1 Effects on economic health
5.2 Effects on the environment
5.3 Inherent problems with the system
5.4 Types of downturns
5.5 Pushing on a string
5.6 Inequities in system
5.7 Potential societal impact
* 6 See also
* 7 References
* 8 External links
Terminology
Critics of fractional reserve banking and the related fiat paper monetary system may refer to it by the term debt-based monetary system,[4] or credit-based monetary system[5].
The term, "debt-based monetary system," and related terms, such as "debt money" are not used by conventional economists or academic mainstream economists. Mainstream economists often refer to "debt money" simply as credit, and distinguish clearly between types of money once it is created.[6] The subject of debt-based money (as distinct from traditional monetary policy) is absent from most reputable established mainstream academic economic publications.[7][8]
Typical criticisms
Mainstream economists do not dispute the idea that banks "create money by extending loans," and this basic concept is covered in most introductory economics textbooks and many popular reference works.[9] Critics of fractional reserve banking often focus on this mechanism and frequently argue that since money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created; they theorize that this can debase the means of exchange. Critics find it problematic that banks "create money out of nothing."
Certain monetary reformers[who?] claim that a fractional-reserve based banking system is inherently destructive and inevitably generates debasement of the currency, extreme inequality or periodic crises; this view is not accepted by mainstream economists, and the dire nature of the claim is considered by some to be akin to conspiracy theories.[10]
Debt-focused critics link the alleged negative effects of fractional reserve banking with a government-enforced "paper" or fiat currency, which they claim allows the practice of fractional reserve banking to continue without a "natural" limitation on the growth of the money supply, thereby causing inherently unsustainable "bubbles" in asset and capital markets, which are vulnerable to speculation in by highly leveraged hedge funds and other bank agents.[11][12][13][14][15][16]
Another argument made by critics is that a nation should only have a "full reserve" banking system. Virtually all banking systems worldwide operate on some form of fractional reserve banking (although the level of required bank reserves and the degree of regulatory constraints on banking differ greatly, with Iceland, Britain and the U.S. being examples of countries with low government-imposed reserve requirements).[17][18]
Non-mainstream views
On considering economic thinkers outside of the mainstream, views on the topic of fractional reserve banking vary greatly. For example, there are individuals that reject the notion that fractional reserve banking is inherently destabilizing and that full-reserve banking is the appropriate solution. Some have referred to the concept of monetary policy with full-reserve banking as "nonsense" (that is, a contradiction in terms).[citation needed] Even within such groups as the Austrian school, at least one thinker has argued that full-reserve banking would impose similar costs of price adjustments in reaction to growth (through a reduction in the overall price level) as would inflation, and hence offer no inherent advantages over fiat currencies and fractional reserve banking.[19]
Basic debate
In stark contrast to conventional economic analysis, some commentators focus on the combined use of fiat currency, fractional-reserve banking and central banking as a negative feature of modern monetary systems. These commentators use the term "debt-based monetary system" to refer to an economic system where money is created primarily through fractional-reserve banking techniques, using the banking system.[4] This form of money is called "debt-based" because as a condition of its creation it must be paid back plus interest at some time in the future.
To some commentators, this implies that as the money supply and the economy grows, the general populace becomes increasingly indebted at the same time due to the idea that debt grows in parallel with money supply growth, and increasing interest payments (from either taxpayers or indebted consumers) are needed to pay bondholders as the money supply grows.[11][16][20]
One argument posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. To some, this implies that debt must grow exponentially in order for the monetary system to remain solvent.[11][16]
Others argue that there is in fact no mathematical necessity for the money supply in a debt-based system to grow, since the interest portion of loan payments is not taken out of circulation, but goes into the lender’s account,[citation needed] where it can be spent back into circulation and eventually be used to pay off some loan principal. The "exponential" growth of debt need not be a concern because if GDP growth is positive, GDP is also growing exponentially and the ratio of debt to GDP may improve.
Basic nature of system
The economic, environmental and social effects arising from money creation through fractional-reserve banking has been subject to much heated political debate for well over two centuries.[11][16][21]
Critics claim that, in contrast to "debt money" (which is money created in parallel with the issuance of debt or credit), "true" fiat currency is issued by the Treasury of a central government debt-free, as no requirement for its eventual return is made as a condition of its creation.[12][20] Government-issued debt-free fiat currency (such as debt-free notes and coins) can circulate perpetually in the economy as "stable" or even sound money (if backed by gold or silver) and although not as stable as hard currency, government-issued debt-free notes and coins (such as United States Notes and silver certificates) do not have the same effects of debt-based money described below.[22] It should be noted however that fiat currency can be a source of hyperinflation if its production is not controlled, as the government has the potential to issue unlimited amounts of fiat currency - provided it is accepted as "money" by the private banking system. Notes and coins in circulation (being defined as M0) now account for a tiny fraction of the total M3 money supply in all developed, debt-based capitalist economies (M0 generally being less than 10% of the total M2 money supply in most developed economies).[23][24]
Similarly, gold, silver and other precious metals have in the past been used as money. Because of the difficulty in increasing the supply of precious metals quickly, some monetary reformers believe a return to the gold standard, or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These monetary reformers often refer to the gold standard and silver standard as "sound money" or "honest money".
Other economic and political criticisms
In a 2003 statement to the U.S. House of Representatives, Ron Paul stated "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".[25][clarification needed]
Some economic thinkers (primarily members of the Austrian School) and political commentators believe that a debt-based monetary system amounts to a subtle form of monetary "fraud" in that it creates money "costlessly" through the use of fractional-reserve banking techniques.[26]
Though Michael Rowbotham has no formal training in political science or economics, he is an active proponent of monetary reform, and argues that this system of money supply is perverse and inherently "anti-democratic", and creates inflationary exponential growth in the economy which leads to environmentally damaging and unstable over-consumption. Critics such as Rowbotham argue that the indebted are forced to induce new consumers to spend their way into debt so existing loans can be repaid with new debt-created money. Failure to achieve this goal results in foreclosure for those businesses and insolvency in the banking system that leads to economic collapse due to the sudden contraction of the money supply.[11][27]
Mark Anielski as well as some political thinkers such as Rowbotham and some economists (such as Hyman Minsky) argue that this system of money supply has characteristics similar to a pyramid scheme, where the newly indebted are compelled to induce others into debt to pay off their own debts.[28]
Rowbotham argues that a major negative side-effect of the debt-based monetary system is its effect on agriculture, claiming that residential development produces one of the greatest continuous injections of debt money into the economy. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density housing.[11] If this is correct, this trend will lead to the destruction of fertile arable land, as this land is progressively re-zoned for speculative new residential development. Rowbotham also predicts that the global supply of fertile arable land will decline, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population.[11][29]
If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to food supply) could find basic foodstuffs increasingly expensive, ultimately resulting in food security becoming a major public policy issue.[11][30]
Effects on economic health
According to Michael Rowbotham the expansion of money through debt creates economic bubbles. This concentrates wealth in the hands of private banks as the populace is forced into debt simply to own a home and educate their children.[11] Debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier. Edward Chancellor compares this type of market to a ponzi scheme.[31]
The bust phase of this business cycle where "debt-based" money growth slows or contracts catches newly indebted businesses and consumers who are left out of the growth cycle.[11][27]
Effects on the environment
There are also critics in the left-wing and environmentalist camps who contend fractional reserve banking (by creating a necessity for indefinite economic growth) leads to environmental destruction and depletion of natural resources.[32][33]
Inherent problems with the system
Some monetary reformers[who?] predict that there will be an increased incidence of financial crises in the developed world, as economic and population growth inevitably slow and as the success of laissez-faire economic political policies result in a reduction in redistributive tax policies which, combined with the debt-legacy of the welfare state, allows an intense and unsustainable concentration of wealth and political power in the financial services sector.[citation needed]
Some monetary reformers[who?] argue that by necessity the promotion of the pyramid scheme inherent in private banking must be conducted by a tiny, secretive, ever-watchful minority[citation needed] because, unlike, for example, labor-intensive agriculture, which is self-sustaining,[citation needed] banking is not.[citation needed] If the majority of the populace were bankers nothing would be produced other than debt and inflation (and very detailed insolvency laws).[citation needed] Historically, usury has therefore often been criticized as inherently parasitic and non-self-sustaining.[citation needed][neutrality is disputed]
Some monetary reformers[who?] argue that it is vital that the indebted "victims" who must sink deeper into debt for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with debt money.[citation needed] Some politicians and others have highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.[34] The associated growth of derivatives during the upward phase of the debt money cycle was referred to as "innovation" in financial markets.[35]
Types of downturns
There are two main kinds of debt money contraction that can cause a collapse in the value of inflated assets.[citation needed]
A "credit squeeze" occurs where new debt money is difficult to access without a high credit rating. At such times marginal borrowers, or those who have borrowed at the end of any debt-induced asset bubble, get "squeezed" out of further borrowing and a contraction in the growth of new debt money occurs, triggering a slow down in the growth of inflated assets. Those assets can then be "harvested" by the private banks through widespread foreclosure or bankruptcy and re-sold to those with the money to buy the distressed assets.[36]
A "credit crunch" occurs where new debt money is not available at any interest rate - even for those with previously acceptable credit ratings - due to widespread insolvency in the banking system. At such times, it is the banking system itself that is insolvent and other financial institutions (including overseas financiers) become reluctant to lend to the domestic banking system, resulting in the domestic banking system being unable to issue loans even to credit worthy borrowers.[37]
At any stage during the downward spiral of a "credit crunch", the central bank in a modern economy can try to save the system from complete economic meltdown by purchasing (either indefinitely or temporarily) the failed debts of the private banks.[38] However, doing so results in cash being transferred to the private banks in exchange for bad debt, thereby violating the general economic precept to avoid moral hazard and effectively makes liquid the failed lending decisions of the private banks.[39] In the U.S. banking system this is called "opening the Fed discount window", where the Federal Reserve temporarily purchases the failed investment portfolios of distressed private banks in exchange for cash. However, this rescue measure may only delay, rather than avoid, the realization of losses in the banking system, as the central bank cannot "force" new borrowing into the system to inject new debt money into the money supply. Somebody has to be a counterparty to borrow the debt money that is being offered. If all market participants realize a "bubble" has formed in assets markets, there will be few (or no) buyers for new debt money, as no one wants to borrow to buy inflated assets no one else will buy. Money markets can therefore remain illiquid even with intense central bank support.
Furthermore, banks can go bust even with intense central bank support, if the issue is not one of liquidity, but one of solvency.[40][41]
Pushing on a string
For more details on this topic, see Pushing on a string.
Some monetary economists describe the opening of the Fed discount window after the bursting of an asset bubble as "pushing on a piece of string", as this measure does not solve the key problem – creating new credit (or debt money) to keep up the growth in the money supply and maintain the required level of liquidity in credit markets.[42][43] This is because unlimited central bank money and low interest rates allow credit creation, but do not force it.
To encourage fresh borrowing, central banks generally combine these rescue measures with an interest rate cut to encourage more new borrowing to allow the existing (failed) debts to be liquidated at or close to their original value. When Alan Greenspan repeatedly resorted to this tactic to revive illiquid money markets this became known in the market as the "Greenspan put", as the effect of these repeated reductions in interest rates was similar to a put option in the stockmarket, insuring banks' lending mistakes would be covered up by the Federal Reserve.[44]
Inequities in system
Aside from the moral hazard issue, the key risk with this tactic (cutting interest rates to encourage new debt money creation) is that the central bank exposes the financial system to a currency crisis, as the growth in the money supply spirals out of control due to the need to save the banks from themselves.[45][46][47]
For these reasons, a collapse in confidence in the solvency of the banking system is one of the most complex and difficult policy issues any government can face.
In such crises of confidence, a central bank may choose to save the current players in the banking sector by printing money and inflating its way out of the crisis, thereby debasing the value of the domestic currency.
This is referred to by some monetary reformers and economists as "socialism for the rich and capitalism for the poor", as many indebted consumers will still lose their houses and be declared bankrupt regardless whether or not the central bank intervenes to save marginal lenders who have been made insolvent through their mis-timing of the credit cycle.[48][49] Future generations of innocent taxpayers may ultimately finance any bail out of reckless lenders, as the money used to fund any bail out will be funds diverted from the general revenue of the central government.[50]
Many central bankers still refer to Walter Bagehot's 1873 commentary on monetary crises, Lombard Street, in an attempt to gain insights into the way in which central bankers should revive illiquid banking systems.[citation needed]
A prime example of the fatal effects of combining aging demographics with reckless bank lending can be found in the case of the Japanese asset price bubble.[51]
Potential societal impact
Some more extreme monetary reformers and conspiracy theorists anticipate the declaration of martial law and the imposition of fascist-style restrictions on civil rights and freedom of speech by the political Establishment to physically protect it from anarchy or military coup when the bubble of debt completely bursts, either through a precipitous currency crisis or debt-created depression.[52] Some conspiracy theorists also anticipate the forced elimination - by any means necessary - of any actual or potential competing currencies or voluntary mediums of exchange that could threaten the viability or legitimacy of the monopoly currency, which could include the compulsory confiscation of all privately-owned gold (gold being the ultimate reserve currency, still used by central banks as a universally accepted medium of exchange for the settlement of international debts).[53][54][55][56][57]
There have been many monetary crises throughout history and prior to widespread anarchy or revolution, in the late stages of volatile, heavily indebted laissez faire capitalism, there are a number of warning signs of impending chaos caused by a complete breakdown of trust in the debt-based monetary system. Just prior to the complete collapse of the pyramid scheme of public and private debt, the economic system tends to feed on itself, and in the past, where debt-created depressions or periods of hyperinflation have occurred in Europe, the U.S. and China, there has been a sustained spike in predatory economic behavior, as the heavily indebted central government and producers are forced to find more extreme (previously considered unethical) methods to extract any remaining wealth from increasingly desperate and impoverished consumers, who are either unwilling or unable to go into further debt without forceful coercion.[58] Long-term investment and sustained capital investment are almost impossible in this environment because the "measuring stick" of return on investment (the real value of money) is so uncertain at times of debt-induced credit crunch, depression or hyperinflation.
As potential new borrowers cannot be found to buy depreciating heavily indebted assets, and international financiers reduce lending as they experience losses on pre-existing loans either through asset or currency depreciation, some analysts predict that the monetary system will seize up due to a deflationary depression or a sustained period of stagflationary hyperinflation resulting in a "final and total catastrophe of our fiat monetary system."[59]
This has often occurred after a failed aggressive war, as international financiers realize the heavily indebted government they funded will not gain the resources it planned to seize as a result of the waging of the war. When this pay-off does not materialize, the government is left with the debt of war without the ability to offset this government debt through the imposition of reparations on the defeated nation and the acquisition of the defeated state's resources. This occurred to Germany after the First World War and Japan after the Second World War.[58]
Whatever the trigger, the key warning sign of any impending monetary crisis and economic anarchy is a sudden currency crisis or bank run.[60] Early warning signs that the private banks themselves are aware of an impending breakdown in the solvency of the financial system would be: a spike in the prices for oil (which is an internationally accepted, inherently limited, store of value, and therefore can act as a modern form of hard currency, oil sometimes being referred to as "black gold"), gold and other inherently limited natural resources essential for non-discretionary industrial production; a spike in the futures contracts for "non-perishable" agricultural commodities such as sugar, coffee, wheat, soybeans and rice, as investors realize the debt-based monetary system has squeezed supplies of arable land; a sudden flight of money to Treasury bills; and/or a sudden spike in the interest rate differential between short-term Treasury bills and asset-backed corporate paper (or a sudden spike in the LIBOR rate in London).[citation needed][61]
Shortly thereafter, some monetary reformers predict that there would be desperate, but ultimately futile central bank intervention, a currency crisis, a panic run on a number of marginal, insolvent banks and hedge funds as investors try to get cash out to invest in inherently limited, non-perishable, in-demand commodities such as oil and gold (and undeveloped agricultural and industrial land in areas of the world with strong economic growth), followed by a recession or depression in the broader heavily indebted economy as the money supply contracts.[62]
See also
* Criticism of the Federal Reserve
* Austrian Business Cycle Theory
* Hyman Minsky
* G. Edward Griffin
* Michael Rowbotham
* Monetary Reform
* Ron Paul
* Silvio Gesell
References
1. ^ Fisher, Irving (1997), 100% Money, Pickering & Chatto Ltd;, ISBN 978-1851962365
2. ^ Daly, Herman E; Farley, Joshua (2004), Ecological Economics: Principles and Applications, Island Press, p. 250, ISBN 1-55963-312-3
3. ^ Friedman, M., A Program for Monetary Stability, New York, Fordham University Press, 1960, pp. 65
4. ^ a b For an example of the public use of the term, see the speech of the Earl of Caithness in the House of Lords on 5 March 1997
5. ^ For example of the public use of the term, see this speech given by Zhou Xiaochuan, Reform the monetary system, 23 March 2009 (BIS), and this article, Roving Cavaliers of Credit by Steve Keen (with commentary by Yves Smith)
6. ^ For an example of the mainstream use of the term "credit" instead of "debt-money" see this example from the Financial Times, 1 May 2008
7. ^ See, for example, Greg Mankiw's Blog, "Austrian Economics", April 3, 2006; as noted in other citations, criticisms of fractional reserve banking are not central to the Austrian School.
8. ^ Paul Krugman, writing at Slate.com, says the Austrian theory of business cycles is "about as worthy of serious study as the phlogiston theory of fire". http://www.slate.com/id/9593
9. ^ See, for example, Peter Kennedy, Macroeconomic Essentials: Understanding Economics in the News, p. 133 "The key thing to recognize is that banks create money by extending loans."
10. ^ Capital Spectator, "Does M3 Matter", November 16, 2005.
11. ^ a b c d e f g h i j Rowbotham, Michael (1998). The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics. Jon Carpenter Publishing. ISBN 9781897766408.
12. ^ a b Stephen A. Zarlenga, The Lost Science of Money AMI (2002)
13. ^ Sound Money, Lew Rockwell
14. ^ Our Money Madness, Lew Rockwell
15. ^ The Case for a Gold Dollar, Murray Rothbard
16. ^ a b c d Antal E. Fekete, The Twilight of Irredeemable Debt
17. ^ Microfoundations and Macroeconomics: An Austrian Perspective, Steven Horwitz, pp. 223.
18. ^ AmosWEB, "Full Reserve Banking"
19. ^ Microfoundations and Macroeconomics: An Austrian Perspective, Steven Horwitz, pp. 223-232.
20. ^ a b The Forgotten War
21. ^ Antal E. Fekete, Fractional Reserve Banking Revisited
22. ^ Honest Money
23. ^ Global Money Supply Ratios
24. ^ Why the Money Supply Made News
25. ^ Paper Ron Paul, Paper Money and Tyranny, Speech in U.S. House of Representative, September 5, 2003
26. ^ Taking Money Back, by Murray Rothbard
27. ^ a b Ponzi Nation
28. ^ Anielski, Mark (2000), "Fertile Obfuscation: Making Money Whilst Eroding Living Capital" (PDF), 34th Annual Conference of the Canadian Economics Association, San Francisco, CA: Redefining Progress, pp. 41–2, http://www.lin.ca/resource/html/arpa02/PC1-FertileObfuscation.pdf, retrieved 2007-12-17
29. ^ Naomi Spencer, World Socialist Website, "Severe food shortages, price spikes threaten world population", 22 December 2007
30. ^ Severe food shortages, price spikes threaten world population
31. ^ Ponzi Nation,"Who is Hyman Minsky?", para 6
32. ^ David Korten, Agenda For A New Economy, Berret-Koehler, 2009
33. ^ George Monbiot, about five sixths of the way down
34. ^ Speech by Senator Kent Conrad (D-ND) on October 20, 2005 regarding the "misleading" reporting of deficit spending by the mainstream media
35. ^ Innovating Our Way to Financial Crisis, by Paul Krugman
36. ^ Market Fundamentalism, by Richard C. Cook
37. ^ Credit Crunch, by Satyajit Das
38. ^ ECB's mind-numbing cash injection
39. ^ Privitizing Profits and Socializing Losses, by Nouriel Roubini
40. ^ Central Banks have No Plan
41. ^ Central Banks get desperate
42. ^ Don't Discount the Fed Discount Window
43. ^ Monetary Policy in Deflation: The Liquidity Trap in History and Practice
44. ^ Moral Hazard and the "Greenspan Put"
45. ^ Exchange Rates and Macroeconomic Policy
46. ^ Central Bank Intervention
47. ^ Financial Instability and the Federal Reserve as a Liquidity Provider, by Frederic S. Mishkin
48. ^ Privatizing Profits and Socializing Losses, by Nouriel Roubini
49. ^ Regulatory Debauchery by Satyajit Das
50. ^ A run on the bank
51. ^ The Japanese and American Bubbles: Been There, Done Some of That
52. ^ New security legislation threats freedoms
53. ^ America's Trade Debts Lead to a Likely Gold Confiscation
54. ^ FBI Raids Liberty Dollar
55. ^ The Solution
56. ^ US Mint Suspends Gold Coin Sales
57. ^ Why a Gold Standard Now?
58. ^ a b Widdig, Bernd (2001). Culture and Inflation in Weimar Germany. University of California Press. ISBN 0520222903. http://books.google.com/books/ucpress?id=kvKAATycUzIC. Retrieved 2007-12-16.
59. ^ Fiat's Reprieve, by Robert K. Landis
60. ^ History of Bank Runs (with references attached)
61. ^ Pleas for rate cut as interbank loans dive
62. ^ Hedge Funds, Financial Intermediation and Systemic Risk
External links
* Libertarian Nation Foundation - Money and Banking
* Fractional Reserve Banking as Economic Parasitism
* Monetary Reform websites
* James Robertson: Creating New Money: A Monetary Reform for the Information Age
Printable version
THE ORIGINS OF THE FEDERAL RESERVE -- MURRAY N. ROTHBARD (153KB)
The Creature From Jekyll Island (by G. Edward Griffin)
Main article: Fractional-reserve banking
Criticisms of fractional reserve banking have been put forward from a variety of perspectives. Critics have included mainstream economists such as Irving Fisher,[1] Frank Knight[2] and Milton Friedman.[3] However, few if any mainstream economists now endorse such views.[citation needed] Within the economics profession, most criticisms are based upon non-mainstream economic theories such as those of the Austrian School. There are also critics from outside the economics profession who advocate a full reserve banking system.
Contents
* 1 Terminology
* 2 Typical criticisms
2.1 Non-mainstream views
* 3 Basic debate
* 4 Basic nature of system
* 5 Other economic and political criticisms
5.1 Effects on economic health
5.2 Effects on the environment
5.3 Inherent problems with the system
5.4 Types of downturns
5.5 Pushing on a string
5.6 Inequities in system
5.7 Potential societal impact
* 6 See also
* 7 References
* 8 External links
Terminology
Critics of fractional reserve banking and the related fiat paper monetary system may refer to it by the term debt-based monetary system,[4] or credit-based monetary system[5].
The term, "debt-based monetary system," and related terms, such as "debt money" are not used by conventional economists or academic mainstream economists. Mainstream economists often refer to "debt money" simply as credit, and distinguish clearly between types of money once it is created.[6] The subject of debt-based money (as distinct from traditional monetary policy) is absent from most reputable established mainstream academic economic publications.[7][8]
Typical criticisms
Mainstream economists do not dispute the idea that banks "create money by extending loans," and this basic concept is covered in most introductory economics textbooks and many popular reference works.[9] Critics of fractional reserve banking often focus on this mechanism and frequently argue that since money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created; they theorize that this can debase the means of exchange. Critics find it problematic that banks "create money out of nothing."
Certain monetary reformers[who?] claim that a fractional-reserve based banking system is inherently destructive and inevitably generates debasement of the currency, extreme inequality or periodic crises; this view is not accepted by mainstream economists, and the dire nature of the claim is considered by some to be akin to conspiracy theories.[10]
Debt-focused critics link the alleged negative effects of fractional reserve banking with a government-enforced "paper" or fiat currency, which they claim allows the practice of fractional reserve banking to continue without a "natural" limitation on the growth of the money supply, thereby causing inherently unsustainable "bubbles" in asset and capital markets, which are vulnerable to speculation in by highly leveraged hedge funds and other bank agents.[11][12][13][14][15][16]
Another argument made by critics is that a nation should only have a "full reserve" banking system. Virtually all banking systems worldwide operate on some form of fractional reserve banking (although the level of required bank reserves and the degree of regulatory constraints on banking differ greatly, with Iceland, Britain and the U.S. being examples of countries with low government-imposed reserve requirements).[17][18]
Non-mainstream views
On considering economic thinkers outside of the mainstream, views on the topic of fractional reserve banking vary greatly. For example, there are individuals that reject the notion that fractional reserve banking is inherently destabilizing and that full-reserve banking is the appropriate solution. Some have referred to the concept of monetary policy with full-reserve banking as "nonsense" (that is, a contradiction in terms).[citation needed] Even within such groups as the Austrian school, at least one thinker has argued that full-reserve banking would impose similar costs of price adjustments in reaction to growth (through a reduction in the overall price level) as would inflation, and hence offer no inherent advantages over fiat currencies and fractional reserve banking.[19]
Basic debate
In stark contrast to conventional economic analysis, some commentators focus on the combined use of fiat currency, fractional-reserve banking and central banking as a negative feature of modern monetary systems. These commentators use the term "debt-based monetary system" to refer to an economic system where money is created primarily through fractional-reserve banking techniques, using the banking system.[4] This form of money is called "debt-based" because as a condition of its creation it must be paid back plus interest at some time in the future.
To some commentators, this implies that as the money supply and the economy grows, the general populace becomes increasingly indebted at the same time due to the idea that debt grows in parallel with money supply growth, and increasing interest payments (from either taxpayers or indebted consumers) are needed to pay bondholders as the money supply grows.[11][16][20]
One argument posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. To some, this implies that debt must grow exponentially in order for the monetary system to remain solvent.[11][16]
Others argue that there is in fact no mathematical necessity for the money supply in a debt-based system to grow, since the interest portion of loan payments is not taken out of circulation, but goes into the lender’s account,[citation needed] where it can be spent back into circulation and eventually be used to pay off some loan principal. The "exponential" growth of debt need not be a concern because if GDP growth is positive, GDP is also growing exponentially and the ratio of debt to GDP may improve.
Basic nature of system
The economic, environmental and social effects arising from money creation through fractional-reserve banking has been subject to much heated political debate for well over two centuries.[11][16][21]
Critics claim that, in contrast to "debt money" (which is money created in parallel with the issuance of debt or credit), "true" fiat currency is issued by the Treasury of a central government debt-free, as no requirement for its eventual return is made as a condition of its creation.[12][20] Government-issued debt-free fiat currency (such as debt-free notes and coins) can circulate perpetually in the economy as "stable" or even sound money (if backed by gold or silver) and although not as stable as hard currency, government-issued debt-free notes and coins (such as United States Notes and silver certificates) do not have the same effects of debt-based money described below.[22] It should be noted however that fiat currency can be a source of hyperinflation if its production is not controlled, as the government has the potential to issue unlimited amounts of fiat currency - provided it is accepted as "money" by the private banking system. Notes and coins in circulation (being defined as M0) now account for a tiny fraction of the total M3 money supply in all developed, debt-based capitalist economies (M0 generally being less than 10% of the total M2 money supply in most developed economies).[23][24]
Similarly, gold, silver and other precious metals have in the past been used as money. Because of the difficulty in increasing the supply of precious metals quickly, some monetary reformers believe a return to the gold standard, or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These monetary reformers often refer to the gold standard and silver standard as "sound money" or "honest money".
Other economic and political criticisms
In a 2003 statement to the U.S. House of Representatives, Ron Paul stated "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".[25][clarification needed]
Some economic thinkers (primarily members of the Austrian School) and political commentators believe that a debt-based monetary system amounts to a subtle form of monetary "fraud" in that it creates money "costlessly" through the use of fractional-reserve banking techniques.[26]
Though Michael Rowbotham has no formal training in political science or economics, he is an active proponent of monetary reform, and argues that this system of money supply is perverse and inherently "anti-democratic", and creates inflationary exponential growth in the economy which leads to environmentally damaging and unstable over-consumption. Critics such as Rowbotham argue that the indebted are forced to induce new consumers to spend their way into debt so existing loans can be repaid with new debt-created money. Failure to achieve this goal results in foreclosure for those businesses and insolvency in the banking system that leads to economic collapse due to the sudden contraction of the money supply.[11][27]
Mark Anielski as well as some political thinkers such as Rowbotham and some economists (such as Hyman Minsky) argue that this system of money supply has characteristics similar to a pyramid scheme, where the newly indebted are compelled to induce others into debt to pay off their own debts.[28]
Rowbotham argues that a major negative side-effect of the debt-based monetary system is its effect on agriculture, claiming that residential development produces one of the greatest continuous injections of debt money into the economy. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density housing.[11] If this is correct, this trend will lead to the destruction of fertile arable land, as this land is progressively re-zoned for speculative new residential development. Rowbotham also predicts that the global supply of fertile arable land will decline, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population.[11][29]
If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to food supply) could find basic foodstuffs increasingly expensive, ultimately resulting in food security becoming a major public policy issue.[11][30]
Effects on economic health
According to Michael Rowbotham the expansion of money through debt creates economic bubbles. This concentrates wealth in the hands of private banks as the populace is forced into debt simply to own a home and educate their children.[11] Debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier. Edward Chancellor compares this type of market to a ponzi scheme.[31]
The bust phase of this business cycle where "debt-based" money growth slows or contracts catches newly indebted businesses and consumers who are left out of the growth cycle.[11][27]
Effects on the environment
There are also critics in the left-wing and environmentalist camps who contend fractional reserve banking (by creating a necessity for indefinite economic growth) leads to environmental destruction and depletion of natural resources.[32][33]
Inherent problems with the system
Some monetary reformers[who?] predict that there will be an increased incidence of financial crises in the developed world, as economic and population growth inevitably slow and as the success of laissez-faire economic political policies result in a reduction in redistributive tax policies which, combined with the debt-legacy of the welfare state, allows an intense and unsustainable concentration of wealth and political power in the financial services sector.[citation needed]
Some monetary reformers[who?] argue that by necessity the promotion of the pyramid scheme inherent in private banking must be conducted by a tiny, secretive, ever-watchful minority[citation needed] because, unlike, for example, labor-intensive agriculture, which is self-sustaining,[citation needed] banking is not.[citation needed] If the majority of the populace were bankers nothing would be produced other than debt and inflation (and very detailed insolvency laws).[citation needed] Historically, usury has therefore often been criticized as inherently parasitic and non-self-sustaining.[citation needed][neutrality is disputed]
Some monetary reformers[who?] argue that it is vital that the indebted "victims" who must sink deeper into debt for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with debt money.[citation needed] Some politicians and others have highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.[34] The associated growth of derivatives during the upward phase of the debt money cycle was referred to as "innovation" in financial markets.[35]
Types of downturns
There are two main kinds of debt money contraction that can cause a collapse in the value of inflated assets.[citation needed]
A "credit squeeze" occurs where new debt money is difficult to access without a high credit rating. At such times marginal borrowers, or those who have borrowed at the end of any debt-induced asset bubble, get "squeezed" out of further borrowing and a contraction in the growth of new debt money occurs, triggering a slow down in the growth of inflated assets. Those assets can then be "harvested" by the private banks through widespread foreclosure or bankruptcy and re-sold to those with the money to buy the distressed assets.[36]
A "credit crunch" occurs where new debt money is not available at any interest rate - even for those with previously acceptable credit ratings - due to widespread insolvency in the banking system. At such times, it is the banking system itself that is insolvent and other financial institutions (including overseas financiers) become reluctant to lend to the domestic banking system, resulting in the domestic banking system being unable to issue loans even to credit worthy borrowers.[37]
At any stage during the downward spiral of a "credit crunch", the central bank in a modern economy can try to save the system from complete economic meltdown by purchasing (either indefinitely or temporarily) the failed debts of the private banks.[38] However, doing so results in cash being transferred to the private banks in exchange for bad debt, thereby violating the general economic precept to avoid moral hazard and effectively makes liquid the failed lending decisions of the private banks.[39] In the U.S. banking system this is called "opening the Fed discount window", where the Federal Reserve temporarily purchases the failed investment portfolios of distressed private banks in exchange for cash. However, this rescue measure may only delay, rather than avoid, the realization of losses in the banking system, as the central bank cannot "force" new borrowing into the system to inject new debt money into the money supply. Somebody has to be a counterparty to borrow the debt money that is being offered. If all market participants realize a "bubble" has formed in assets markets, there will be few (or no) buyers for new debt money, as no one wants to borrow to buy inflated assets no one else will buy. Money markets can therefore remain illiquid even with intense central bank support.
Furthermore, banks can go bust even with intense central bank support, if the issue is not one of liquidity, but one of solvency.[40][41]
Pushing on a string
For more details on this topic, see Pushing on a string.
Some monetary economists describe the opening of the Fed discount window after the bursting of an asset bubble as "pushing on a piece of string", as this measure does not solve the key problem – creating new credit (or debt money) to keep up the growth in the money supply and maintain the required level of liquidity in credit markets.[42][43] This is because unlimited central bank money and low interest rates allow credit creation, but do not force it.
To encourage fresh borrowing, central banks generally combine these rescue measures with an interest rate cut to encourage more new borrowing to allow the existing (failed) debts to be liquidated at or close to their original value. When Alan Greenspan repeatedly resorted to this tactic to revive illiquid money markets this became known in the market as the "Greenspan put", as the effect of these repeated reductions in interest rates was similar to a put option in the stockmarket, insuring banks' lending mistakes would be covered up by the Federal Reserve.[44]
Inequities in system
Aside from the moral hazard issue, the key risk with this tactic (cutting interest rates to encourage new debt money creation) is that the central bank exposes the financial system to a currency crisis, as the growth in the money supply spirals out of control due to the need to save the banks from themselves.[45][46][47]
For these reasons, a collapse in confidence in the solvency of the banking system is one of the most complex and difficult policy issues any government can face.
In such crises of confidence, a central bank may choose to save the current players in the banking sector by printing money and inflating its way out of the crisis, thereby debasing the value of the domestic currency.
This is referred to by some monetary reformers and economists as "socialism for the rich and capitalism for the poor", as many indebted consumers will still lose their houses and be declared bankrupt regardless whether or not the central bank intervenes to save marginal lenders who have been made insolvent through their mis-timing of the credit cycle.[48][49] Future generations of innocent taxpayers may ultimately finance any bail out of reckless lenders, as the money used to fund any bail out will be funds diverted from the general revenue of the central government.[50]
Many central bankers still refer to Walter Bagehot's 1873 commentary on monetary crises, Lombard Street, in an attempt to gain insights into the way in which central bankers should revive illiquid banking systems.[citation needed]
A prime example of the fatal effects of combining aging demographics with reckless bank lending can be found in the case of the Japanese asset price bubble.[51]
Potential societal impact
Some more extreme monetary reformers and conspiracy theorists anticipate the declaration of martial law and the imposition of fascist-style restrictions on civil rights and freedom of speech by the political Establishment to physically protect it from anarchy or military coup when the bubble of debt completely bursts, either through a precipitous currency crisis or debt-created depression.[52] Some conspiracy theorists also anticipate the forced elimination - by any means necessary - of any actual or potential competing currencies or voluntary mediums of exchange that could threaten the viability or legitimacy of the monopoly currency, which could include the compulsory confiscation of all privately-owned gold (gold being the ultimate reserve currency, still used by central banks as a universally accepted medium of exchange for the settlement of international debts).[53][54][55][56][57]
There have been many monetary crises throughout history and prior to widespread anarchy or revolution, in the late stages of volatile, heavily indebted laissez faire capitalism, there are a number of warning signs of impending chaos caused by a complete breakdown of trust in the debt-based monetary system. Just prior to the complete collapse of the pyramid scheme of public and private debt, the economic system tends to feed on itself, and in the past, where debt-created depressions or periods of hyperinflation have occurred in Europe, the U.S. and China, there has been a sustained spike in predatory economic behavior, as the heavily indebted central government and producers are forced to find more extreme (previously considered unethical) methods to extract any remaining wealth from increasingly desperate and impoverished consumers, who are either unwilling or unable to go into further debt without forceful coercion.[58] Long-term investment and sustained capital investment are almost impossible in this environment because the "measuring stick" of return on investment (the real value of money) is so uncertain at times of debt-induced credit crunch, depression or hyperinflation.
As potential new borrowers cannot be found to buy depreciating heavily indebted assets, and international financiers reduce lending as they experience losses on pre-existing loans either through asset or currency depreciation, some analysts predict that the monetary system will seize up due to a deflationary depression or a sustained period of stagflationary hyperinflation resulting in a "final and total catastrophe of our fiat monetary system."[59]
This has often occurred after a failed aggressive war, as international financiers realize the heavily indebted government they funded will not gain the resources it planned to seize as a result of the waging of the war. When this pay-off does not materialize, the government is left with the debt of war without the ability to offset this government debt through the imposition of reparations on the defeated nation and the acquisition of the defeated state's resources. This occurred to Germany after the First World War and Japan after the Second World War.[58]
Whatever the trigger, the key warning sign of any impending monetary crisis and economic anarchy is a sudden currency crisis or bank run.[60] Early warning signs that the private banks themselves are aware of an impending breakdown in the solvency of the financial system would be: a spike in the prices for oil (which is an internationally accepted, inherently limited, store of value, and therefore can act as a modern form of hard currency, oil sometimes being referred to as "black gold"), gold and other inherently limited natural resources essential for non-discretionary industrial production; a spike in the futures contracts for "non-perishable" agricultural commodities such as sugar, coffee, wheat, soybeans and rice, as investors realize the debt-based monetary system has squeezed supplies of arable land; a sudden flight of money to Treasury bills; and/or a sudden spike in the interest rate differential between short-term Treasury bills and asset-backed corporate paper (or a sudden spike in the LIBOR rate in London).[citation needed][61]
Shortly thereafter, some monetary reformers predict that there would be desperate, but ultimately futile central bank intervention, a currency crisis, a panic run on a number of marginal, insolvent banks and hedge funds as investors try to get cash out to invest in inherently limited, non-perishable, in-demand commodities such as oil and gold (and undeveloped agricultural and industrial land in areas of the world with strong economic growth), followed by a recession or depression in the broader heavily indebted economy as the money supply contracts.[62]
See also
* Criticism of the Federal Reserve
* Austrian Business Cycle Theory
* Hyman Minsky
* G. Edward Griffin
* Michael Rowbotham
* Monetary Reform
* Ron Paul
* Silvio Gesell
References
1. ^ Fisher, Irving (1997), 100% Money, Pickering & Chatto Ltd;, ISBN 978-1851962365
2. ^ Daly, Herman E; Farley, Joshua (2004), Ecological Economics: Principles and Applications, Island Press, p. 250, ISBN 1-55963-312-3
3. ^ Friedman, M., A Program for Monetary Stability, New York, Fordham University Press, 1960, pp. 65
4. ^ a b For an example of the public use of the term, see the speech of the Earl of Caithness in the House of Lords on 5 March 1997
5. ^ For example of the public use of the term, see this speech given by Zhou Xiaochuan, Reform the monetary system, 23 March 2009 (BIS), and this article, Roving Cavaliers of Credit by Steve Keen (with commentary by Yves Smith)
6. ^ For an example of the mainstream use of the term "credit" instead of "debt-money" see this example from the Financial Times, 1 May 2008
7. ^ See, for example, Greg Mankiw's Blog, "Austrian Economics", April 3, 2006; as noted in other citations, criticisms of fractional reserve banking are not central to the Austrian School.
8. ^ Paul Krugman, writing at Slate.com, says the Austrian theory of business cycles is "about as worthy of serious study as the phlogiston theory of fire". http://www.slate.com/id/9593
9. ^ See, for example, Peter Kennedy, Macroeconomic Essentials: Understanding Economics in the News, p. 133 "The key thing to recognize is that banks create money by extending loans."
10. ^ Capital Spectator, "Does M3 Matter", November 16, 2005.
11. ^ a b c d e f g h i j Rowbotham, Michael (1998). The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics. Jon Carpenter Publishing. ISBN 9781897766408.
12. ^ a b Stephen A. Zarlenga, The Lost Science of Money AMI (2002)
13. ^ Sound Money, Lew Rockwell
14. ^ Our Money Madness, Lew Rockwell
15. ^ The Case for a Gold Dollar, Murray Rothbard
16. ^ a b c d Antal E. Fekete, The Twilight of Irredeemable Debt
17. ^ Microfoundations and Macroeconomics: An Austrian Perspective, Steven Horwitz, pp. 223.
18. ^ AmosWEB, "Full Reserve Banking"
19. ^ Microfoundations and Macroeconomics: An Austrian Perspective, Steven Horwitz, pp. 223-232.
20. ^ a b The Forgotten War
21. ^ Antal E. Fekete, Fractional Reserve Banking Revisited
22. ^ Honest Money
23. ^ Global Money Supply Ratios
24. ^ Why the Money Supply Made News
25. ^ Paper Ron Paul, Paper Money and Tyranny, Speech in U.S. House of Representative, September 5, 2003
26. ^ Taking Money Back, by Murray Rothbard
27. ^ a b Ponzi Nation
28. ^ Anielski, Mark (2000), "Fertile Obfuscation: Making Money Whilst Eroding Living Capital" (PDF), 34th Annual Conference of the Canadian Economics Association, San Francisco, CA: Redefining Progress, pp. 41–2, http://www.lin.ca/resource/html/arpa02/PC1-FertileObfuscation.pdf, retrieved 2007-12-17
29. ^ Naomi Spencer, World Socialist Website, "Severe food shortages, price spikes threaten world population", 22 December 2007
30. ^ Severe food shortages, price spikes threaten world population
31. ^ Ponzi Nation,"Who is Hyman Minsky?", para 6
32. ^ David Korten, Agenda For A New Economy, Berret-Koehler, 2009
33. ^ George Monbiot, about five sixths of the way down
34. ^ Speech by Senator Kent Conrad (D-ND) on October 20, 2005 regarding the "misleading" reporting of deficit spending by the mainstream media
35. ^ Innovating Our Way to Financial Crisis, by Paul Krugman
36. ^ Market Fundamentalism, by Richard C. Cook
37. ^ Credit Crunch, by Satyajit Das
38. ^ ECB's mind-numbing cash injection
39. ^ Privitizing Profits and Socializing Losses, by Nouriel Roubini
40. ^ Central Banks have No Plan
41. ^ Central Banks get desperate
42. ^ Don't Discount the Fed Discount Window
43. ^ Monetary Policy in Deflation: The Liquidity Trap in History and Practice
44. ^ Moral Hazard and the "Greenspan Put"
45. ^ Exchange Rates and Macroeconomic Policy
46. ^ Central Bank Intervention
47. ^ Financial Instability and the Federal Reserve as a Liquidity Provider, by Frederic S. Mishkin
48. ^ Privatizing Profits and Socializing Losses, by Nouriel Roubini
49. ^ Regulatory Debauchery by Satyajit Das
50. ^ A run on the bank
51. ^ The Japanese and American Bubbles: Been There, Done Some of That
52. ^ New security legislation threats freedoms
53. ^ America's Trade Debts Lead to a Likely Gold Confiscation
54. ^ FBI Raids Liberty Dollar
55. ^ The Solution
56. ^ US Mint Suspends Gold Coin Sales
57. ^ Why a Gold Standard Now?
58. ^ a b Widdig, Bernd (2001). Culture and Inflation in Weimar Germany. University of California Press. ISBN 0520222903. http://books.google.com/books/ucpress?id=kvKAATycUzIC. Retrieved 2007-12-16.
59. ^ Fiat's Reprieve, by Robert K. Landis
60. ^ History of Bank Runs (with references attached)
61. ^ Pleas for rate cut as interbank loans dive
62. ^ Hedge Funds, Financial Intermediation and Systemic Risk
External links
* Libertarian Nation Foundation - Money and Banking
* Fractional Reserve Banking as Economic Parasitism
* Monetary Reform websites
* James Robertson: Creating New Money: A Monetary Reform for the Information Age
The Lessons of the Panic.
A Nytime article from October 8, 1857, Wednesday
There has been many an eye wearied, by seeing the costly and gaudy evidences of thoughtless extravagance,which has brought ruin upon a once happy home. Too many banckruptcies and suspensions which are caused by reckless sepctulation and personal extravagences. It is among the consolitaions to be derived from history financial panics that we shall be the wiser for them after they are over, and less likely to suffer from them again.
Sounds familier ?
View Full Article Pdf (84K)
There has been many an eye wearied, by seeing the costly and gaudy evidences of thoughtless extravagance,which has brought ruin upon a once happy home. Too many banckruptcies and suspensions which are caused by reckless sepctulation and personal extravagences. It is among the consolitaions to be derived from history financial panics that we shall be the wiser for them after they are over, and less likely to suffer from them again.
Sounds familier ?
View Full Article Pdf (84K)
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