Weimar, USA?
December 11, 2008 3:50 PM Subscribe
Okay, don't know much 'bout economics, so can somebody please explain to me in simple terms how, with the US treasury handing out trillion-dollar bailouts like lollipops, the unemployment rate skyrocketing (thereby removing the real wealth generators from the economy) and no country in the world crazy enough to lend us a cent -- HOW can we possibly not wind up with hyper (and by hyper, I mean Weimar-style) inflation, sooner rather than later?
So far, even with negative interest rates, T-Bills are still selling like hotcakes, so we aren't printing new money, just shuffling around the money that already exists, so no hyperinflation.
posted by nomisxid at 4:02 PM on December 11, 2008
posted by nomisxid at 4:02 PM on December 11, 2008
"no country in the world crazy enough to lend us a cent"
Of course they are lending us money. What do you think all the bonds and assorted securities China's buying from us are? Nothing but billions and billions of dollars of loans.
posted by DieHipsterDie at 4:04 PM on December 11, 2008
Of course they are lending us money. What do you think all the bonds and assorted securities China's buying from us are? Nothing but billions and billions of dollars of loans.
posted by DieHipsterDie at 4:04 PM on December 11, 2008
no country in the world crazy enough to lend us a cent
This is wrong, it seems that everyone wants to buy U.S. treasury securities these days, even with negative yields.
posted by grouse at 4:05 PM on December 11, 2008
This is wrong, it seems that everyone wants to buy U.S. treasury securities these days, even with negative yields.
posted by grouse at 4:05 PM on December 11, 2008
A $1 trillion bail-out that was never paid back (most of these proposals are actually loans) would represent a loss of 7.5% of the GDP (US GDP = $13.3 T). For comparison, the increase in military spending during the Korean war was an amount equal to 10% of the GDP. So in simple terms, if we didn't hyper-inflate as a result of spending during the Korean war, we shouldn't really expect it to happen now, either.
posted by 0xFCAF at 4:06 PM on December 11, 2008
posted by 0xFCAF at 4:06 PM on December 11, 2008
The sum of all the bailout-type stuff is less than two trillion dollars. Compare that with total federal spending per year of about 3.5 trillion.
The unemployment rate is not skyrocketing, it's at about 8%, and has slowly moved up over months.
Many countries in the world are willing to lend us money, our treasury bills are still being bought. That's how we're paying for TARP and stuff.
posted by bluejayk at 4:07 PM on December 11, 2008
The unemployment rate is not skyrocketing, it's at about 8%, and has slowly moved up over months.
Many countries in the world are willing to lend us money, our treasury bills are still being bought. That's how we're paying for TARP and stuff.
posted by bluejayk at 4:07 PM on December 11, 2008
The first is that currently the risk is that we're entering a severe deflationary period. Essentially the credit markets have already flooded the market with cash, this has dried up and is creating deflationary pressure. The money of the bailout is hopefully counteracting this trend.
Second the bailout money isn't just free money - its meant to be paid back with interest. This wouldn't have the same affect as a billion dollars given away for free.
posted by bitdamaged at 4:12 PM on December 11, 2008
Second the bailout money isn't just free money - its meant to be paid back with interest. This wouldn't have the same affect as a billion dollars given away for free.
posted by bitdamaged at 4:12 PM on December 11, 2008
the unemployment rate skyrocketing (thereby removing the real wealth generators from the economy)
Tertiary service sector jobs don't create wealth. The only wealth generators are Primary and Secondary sector jobs.
and no country in the world crazy enough to lend us a cent
I think this is incorrect. Here's the latest table from September. China and OPEC (plus their offshore cats paws) was adding, though with falling oil OPEC is going to reverse no doubt.
HOW can we possibly not wind up with hyper (and by hyper, I mean Weimar-style) inflation, sooner rather than later?
Good question. What I generally see online is people mooting Japan-style deflation followed by 70s style inflation.
But note that the world is a lot different from 1920s postwar Germany. Wealth is that which satisfies human needs and wants, nothing less and nothing more, and the world is immensely more efficient in producing wealth now than it was 80 years ago.
The current miasma is the result of over-extension of exuberance and all the major lenders losing their asses in making horrible credit decisions 2004-2007. Additionally, there was way too much capacity built up in response to the 2004-2006 boom times -- boom times largely driven by said bad credit extensions -- so what we're looking at going forward is a return to the 2001-2002 recession realities, only with a lot more household debt and twice the money supply out there.
IMO, the core reality of the economy is that land prices got bid up past the point of sanity. Same thing happened in 1920s US and 1980s Japan (and 1980s US for that matter).
When this happens many rich people become somewhat less rich and many middle class people become poor and poor people stay as they are.
We had the twin PC productivity boom (essentially Windows making the Mac's UI advances available to all) + the internet infrastructure boom (say, 1994-1999) to pull us out of the last-but-one recession of 1991-1992.
But what determines inflation is simply cost-of-living vs. wages. If our cost of living doesn't skyrocket, and/or we don't have the bargaining power to raise our wages, then there simply cannot be hyper-inflation. That's AFAICT related to the Liquidity Trap.
posted by troy at 4:12 PM on December 11, 2008 [2 favorites]
Tertiary service sector jobs don't create wealth. The only wealth generators are Primary and Secondary sector jobs.
and no country in the world crazy enough to lend us a cent
I think this is incorrect. Here's the latest table from September. China and OPEC (plus their offshore cats paws) was adding, though with falling oil OPEC is going to reverse no doubt.
HOW can we possibly not wind up with hyper (and by hyper, I mean Weimar-style) inflation, sooner rather than later?
Good question. What I generally see online is people mooting Japan-style deflation followed by 70s style inflation.
But note that the world is a lot different from 1920s postwar Germany. Wealth is that which satisfies human needs and wants, nothing less and nothing more, and the world is immensely more efficient in producing wealth now than it was 80 years ago.
The current miasma is the result of over-extension of exuberance and all the major lenders losing their asses in making horrible credit decisions 2004-2007. Additionally, there was way too much capacity built up in response to the 2004-2006 boom times -- boom times largely driven by said bad credit extensions -- so what we're looking at going forward is a return to the 2001-2002 recession realities, only with a lot more household debt and twice the money supply out there.
IMO, the core reality of the economy is that land prices got bid up past the point of sanity. Same thing happened in 1920s US and 1980s Japan (and 1980s US for that matter).
When this happens many rich people become somewhat less rich and many middle class people become poor and poor people stay as they are.
We had the twin PC productivity boom (essentially Windows making the Mac's UI advances available to all) + the internet infrastructure boom (say, 1994-1999) to pull us out of the last-but-one recession of 1991-1992.
But what determines inflation is simply cost-of-living vs. wages. If our cost of living doesn't skyrocket, and/or we don't have the bargaining power to raise our wages, then there simply cannot be hyper-inflation. That's AFAICT related to the Liquidity Trap.
posted by troy at 4:12 PM on December 11, 2008 [2 favorites]
People are lining up to lend the United States money. It counts as an asset the ability to tax the earnings of the the workforce of the largest economy on earth. And all the corporations there.
The yeild on us treasuries is at historical lows. This means that there's lots of demand to lend the US moneyLenders are willing to take a low interest rate precisely for the security that an asset of the US government provides. When huge (formerly) successful investment banks start going bankrupt, the only thing that looks like a sure thing is the US government. The financial position of the government isn't as bad as it has been in the past.
In the 5-10 year range, inflation could be a problem as all this money sloshes around the exonomy. No one is sure of this though; no one really knows how much money essentially disappeared in the subprime collapse.
Also, it's hard to know how much money is being printed. Some of the bailout money is in the form of loan guarantees. It's not spent unless the borrower defaults. Foreclosures are at historic highs, but are under 7%. Which means 93% of homeowners are still paying their mortgages. There are a lot of mortgage based bonds that be paid out in full.
posted by thenormshow at 4:12 PM on December 11, 2008
The yeild on us treasuries is at historical lows. This means that there's lots of demand to lend the US moneyLenders are willing to take a low interest rate precisely for the security that an asset of the US government provides. When huge (formerly) successful investment banks start going bankrupt, the only thing that looks like a sure thing is the US government. The financial position of the government isn't as bad as it has been in the past.
In the 5-10 year range, inflation could be a problem as all this money sloshes around the exonomy. No one is sure of this though; no one really knows how much money essentially disappeared in the subprime collapse.
Also, it's hard to know how much money is being printed. Some of the bailout money is in the form of loan guarantees. It's not spent unless the borrower defaults. Foreclosures are at historic highs, but are under 7%. Which means 93% of homeowners are still paying their mortgages. There are a lot of mortgage based bonds that be paid out in full.
posted by thenormshow at 4:12 PM on December 11, 2008
The unemployment rate is not skyrocketing, it's at about 8%, and has slowly moved up over months.
This graph from Calculated Risk tells the story.
posted by troy at 4:15 PM on December 11, 2008
This graph from Calculated Risk tells the story.
posted by troy at 4:15 PM on December 11, 2008
no one really knows how much money essentially disappeared in the subprime collapse
What is $0.00? This is a zero-sum game, is it not?
posted by troy at 4:16 PM on December 11, 2008
What is $0.00? This is a zero-sum game, is it not?
posted by troy at 4:16 PM on December 11, 2008
What is $0.00? This is a zero-sum game, is it not?
Let's say you loan me $10. Then I set that money on fire and declare bankruptcy. If this is a zero-sum game, who has the $10 now?
posted by 0xFCAF at 4:23 PM on December 11, 2008
Let's say you loan me $10. Then I set that money on fire and declare bankruptcy. If this is a zero-sum game, who has the $10 now?
posted by 0xFCAF at 4:23 PM on December 11, 2008
Yesterday the Treasury sold $30 billion worth of four-week securities that paid 0% interest . That's right. There are large institutional investors that are lending the US money and not demanding any interest. That is how scared they are.
posted by rdr at 4:23 PM on December 11, 2008 [2 favorites]
posted by rdr at 4:23 PM on December 11, 2008 [2 favorites]
Foreclosures are at historic highs, but are under 7%. Which means 93% of homeowners are still paying their mortgages.
Gee you sound like Ben Stein about 15 months ago.
The bottom line is that there was $5T of mortgage lending that went out 2003-2007. If those collateral price levels prove to be unsupportable (thanks to eg. a Japan-style retrenchment of land values), then losses on this lending will be 20-30%. 10% is already in the bag, we'll be lucky to bottom out at 20% total losses, and Roubini et al are saying 30% is entirely possible.
Land values are the key to understanding how the economy works IMO. When times are good, land values get bid up because owning land with leverage is the surest way to capture income from the rest of the actual productive economy. Every good capitalist knows this, which results in land prices being bid to speculative heights; eventually the bottom falls out and everything resets and the cycle repeats. One slight difference this cycle was that the middle class was able to get in on this game in a big way thanks the innovation of zero-down stated-income IO or negative-am loans.
posted by troy at 4:27 PM on December 11, 2008
Gee you sound like Ben Stein about 15 months ago.
The bottom line is that there was $5T of mortgage lending that went out 2003-2007. If those collateral price levels prove to be unsupportable (thanks to eg. a Japan-style retrenchment of land values), then losses on this lending will be 20-30%. 10% is already in the bag, we'll be lucky to bottom out at 20% total losses, and Roubini et al are saying 30% is entirely possible.
Land values are the key to understanding how the economy works IMO. When times are good, land values get bid up because owning land with leverage is the surest way to capture income from the rest of the actual productive economy. Every good capitalist knows this, which results in land prices being bid to speculative heights; eventually the bottom falls out and everything resets and the cycle repeats. One slight difference this cycle was that the middle class was able to get in on this game in a big way thanks the innovation of zero-down stated-income IO or negative-am loans.
posted by troy at 4:27 PM on December 11, 2008
Let's say you loan me $10. Then I set that money on fire and declare bankruptcy. If this is a zero-sum game, who has the $10 now?
Ah, but nobody set the money afire this cycle. It's still out there, which was my point.
posted by troy at 4:28 PM on December 11, 2008
Ah, but nobody set the money afire this cycle. It's still out there, which was my point.
posted by troy at 4:28 PM on December 11, 2008
This graph from Calculated Risk tells the story.
That it looks just like 2001-2002? We didn't have hyper-inflation then.
posted by smackfu at 4:34 PM on December 11, 2008
That it looks just like 2001-2002? We didn't have hyper-inflation then.
posted by smackfu at 4:34 PM on December 11, 2008
There were political factors running in the Weimar sitation. Remember, other economies were doing fine at the time.
Essentially a demand for WWI reparations payment in gold or foreign currency meant that a lot of marks had to exchanged. This artificially depressed the value of the mark because unnaturally high numbers of marks were being sold to meet the need for the reparations, so supply was high and demand low.
The mark lost value rapidly. Germany has always been dependent on importing what it needed and exporting a lot to make up for it. This meant that everything it was selling being worth less than before and everything it was buying being more expensive.
Currently, the dollar is going up,a sign of deflation. I suspect it will continue because tons of money that existed on the books is being wiped out and the supply of money is shrinking to cover the total amount of stuff in the economy.
Beware, I don't know shit about economics. I do have a masters in German history so your on better ground there.
posted by Ironmouth at 4:38 PM on December 11, 2008 [1 favorite]
Essentially a demand for WWI reparations payment in gold or foreign currency meant that a lot of marks had to exchanged. This artificially depressed the value of the mark because unnaturally high numbers of marks were being sold to meet the need for the reparations, so supply was high and demand low.
The mark lost value rapidly. Germany has always been dependent on importing what it needed and exporting a lot to make up for it. This meant that everything it was selling being worth less than before and everything it was buying being more expensive.
Currently, the dollar is going up,a sign of deflation. I suspect it will continue because tons of money that existed on the books is being wiped out and the supply of money is shrinking to cover the total amount of stuff in the economy.
Beware, I don't know shit about economics. I do have a masters in German history so your on better ground there.
posted by Ironmouth at 4:38 PM on December 11, 2008 [1 favorite]
Ah, but nobody set the money afire this cycle. It's still out there, which was my point.
People invest a trillion dollars in the stock market. The value of their investments is now five hundred billion dollars. Who has the missing five hundred billion dollars?
posted by Justinian at 4:39 PM on December 11, 2008
People invest a trillion dollars in the stock market. The value of their investments is now five hundred billion dollars. Who has the missing five hundred billion dollars?
posted by Justinian at 4:39 PM on December 11, 2008
That it looks just like 2001-2002? We didn't have hyper-inflation then.
The original assertion was that unemployment was not skyrocketing. That is not correct as one can see by the graph of continuing claims.
I too do not see hyperinflation since there is so much wealth built up over the past 50 years that we can coast on our capital and don't actually "need" much to survive, unlike Weimar Germany and Zimbabwe.
Seriously, outside of the rent payment, ie on $400 a month I can live with the quality of life arguably better than an 80s millionaire (xbox 360 FTW!). And guess what, this rent payment is negotiable.
Every dollar we pay for land value -- either as rent or a mortgage payment -- is pure surplus and can be eliminated from our expenses -- and the LL or noteholder's income stream -- without affecting the sum total of wealth whatsoever.
Valuation is not wealth.
posted by troy at 4:44 PM on December 11, 2008
The original assertion was that unemployment was not skyrocketing. That is not correct as one can see by the graph of continuing claims.
I too do not see hyperinflation since there is so much wealth built up over the past 50 years that we can coast on our capital and don't actually "need" much to survive, unlike Weimar Germany and Zimbabwe.
Seriously, outside of the rent payment, ie on $400 a month I can live with the quality of life arguably better than an 80s millionaire (xbox 360 FTW!). And guess what, this rent payment is negotiable.
Every dollar we pay for land value -- either as rent or a mortgage payment -- is pure surplus and can be eliminated from our expenses -- and the LL or noteholder's income stream -- without affecting the sum total of wealth whatsoever.
Valuation is not wealth.
posted by troy at 4:44 PM on December 11, 2008
People invest a trillion dollars in the stock market. The value of their investments is now five hundred billion dollars. Who has the missing five hundred billion dollars?
Careful with terms here. For every buyer there was a seller. That's who has that trillion dollars now.
As for the $2T in total lost market cap in 3Q08, that's different, since valuation is not wealth, even though we think it is. Market cap is just multiplying shares outstanding by the last traded price, but you can't trade all those shares at that price so market cap is just a fake number that gives some useful information but is a misleading when talking about wealth.
As I said above, valuation is not wealth.
posted by troy at 4:48 PM on December 11, 2008 [2 favorites]
Careful with terms here. For every buyer there was a seller. That's who has that trillion dollars now.
As for the $2T in total lost market cap in 3Q08, that's different, since valuation is not wealth, even though we think it is. Market cap is just multiplying shares outstanding by the last traded price, but you can't trade all those shares at that price so market cap is just a fake number that gives some useful information but is a misleading when talking about wealth.
As I said above, valuation is not wealth.
posted by troy at 4:48 PM on December 11, 2008 [2 favorites]
"Tertiary service sector jobs don't create wealth. The only wealth generators are Primary and Secondary sector jobs."
That's not true, especially as you define wealth later: "Wealth is that which satisfies human needs and wants, nothing less and nothing more, and the world is immensely more efficient in producing wealth now than it was 80 years ago."
Wealth can very much be vested in services. You might also want to regard the Three Sectors model with a little less credulity, given the variance between hypothesis and history.
posted by klangklangston at 4:59 PM on December 11, 2008
That's not true, especially as you define wealth later: "Wealth is that which satisfies human needs and wants, nothing less and nothing more, and the world is immensely more efficient in producing wealth now than it was 80 years ago."
Wealth can very much be vested in services. You might also want to regard the Three Sectors model with a little less credulity, given the variance between hypothesis and history.
posted by klangklangston at 4:59 PM on December 11, 2008
Wealth can very much be vested in services
yes, this is something I'm still trying to get my head around. Adam Smith first described wealth as "the annual produce of the land and labour of the society"
Inherent in money is the power to command labor services, and this labor is in fact what we replace by buying goods that substitute for these services (eg. buying a bicycle instead of hiring a rickshaw to go about town, buying an oscillating fan instead of hiring a guy with a big feather dealybob).
But at the end of the day we can't just go around selling each other our services. We gotta eat, and other hard goods are consumed in living.
There wouldn't be hyper-inflation in Zimbabwe if they could exchange services. It is the outflow of money -- their trade imbalance -- from their economy that is what is inflationary.
posted by troy at 5:14 PM on December 11, 2008
yes, this is something I'm still trying to get my head around. Adam Smith first described wealth as "the annual produce of the land and labour of the society"
Inherent in money is the power to command labor services, and this labor is in fact what we replace by buying goods that substitute for these services (eg. buying a bicycle instead of hiring a rickshaw to go about town, buying an oscillating fan instead of hiring a guy with a big feather dealybob).
But at the end of the day we can't just go around selling each other our services. We gotta eat, and other hard goods are consumed in living.
There wouldn't be hyper-inflation in Zimbabwe if they could exchange services. It is the outflow of money -- their trade imbalance -- from their economy that is what is inflationary.
posted by troy at 5:14 PM on December 11, 2008
it seems that everyone wants to buy U.S. treasury securities these days, even with negative yields.
WHY? This is really at the root of the OP's question. Stability??
posted by crapmatic at 5:26 PM on December 11, 2008
WHY? This is really at the root of the OP's question. Stability??
posted by crapmatic at 5:26 PM on December 11, 2008
WHY? This is really at the root of the OP's question. Stability??
Return of principal > return on principal.
posted by troy at 5:36 PM on December 11, 2008 [2 favorites]
Return of principal > return on principal.
posted by troy at 5:36 PM on December 11, 2008 [2 favorites]
Just Keeping My Money
Where? The US Treasury is offering to keep it for you for FREE! Can't beat that!
posted by troy at 6:23 PM on December 11, 2008 [5 favorites]
Where? The US Treasury is offering to keep it for you for FREE! Can't beat that!
posted by troy at 6:23 PM on December 11, 2008 [5 favorites]
Yesterday the Treasury sold $30 billion worth of four-week securities that paid 0% interest . That's right. There are large institutional investors that are lending the US money and not demanding any interest. That is how scared they are.
Scared of deflation. If every other place you can keep your money is going to lose value, 0% interest is a gain.
The reason inflation isn't a (short term) problem is that so much money has disappeared in the last year. It's the problem with the fractional reserve banking system. When it works, it creates money. But when it doesn't, it destroys that money it created. During normal times, this mostly balances out.
Also, don't confuse the Federal Reserve with the Treasury.
posted by gjc at 7:42 PM on December 11, 2008 [1 favorite]
But when it doesn't, it destroys that money it created
$5T was lent 2003-2007, and the M3 money supply rose from $7T in 2001 to 14T this year. I see the money creation, but not the destruction.
I've been looking for an answer as to how much of the $5T in new lending was "fractional reserve" vs. how much was "recycled" money via CDOs etc. I think the answer comes from this chart showing the rise in Treasury Debt held by the Fed. When the Fed takes a Treasury security, it issues money to the .gov's bank accounts, which then count as reserves that the banks can lend 9:1 against.
AFAICT there's no money "destroyed" when a bank loan goes bad, any more that money is destroyed when a 7/11 is robbed.
posted by troy at 8:43 PM on December 11, 2008
$5T was lent 2003-2007, and the M3 money supply rose from $7T in 2001 to 14T this year. I see the money creation, but not the destruction.
I've been looking for an answer as to how much of the $5T in new lending was "fractional reserve" vs. how much was "recycled" money via CDOs etc. I think the answer comes from this chart showing the rise in Treasury Debt held by the Fed. When the Fed takes a Treasury security, it issues money to the .gov's bank accounts, which then count as reserves that the banks can lend 9:1 against.
AFAICT there's no money "destroyed" when a bank loan goes bad, any more that money is destroyed when a 7/11 is robbed.
posted by troy at 8:43 PM on December 11, 2008
Deleveraging. Fractional reserve banking inflates the money supply. When debts go bad and banks have to reel in capital, the money supply deflates.
That nutbar website that says that M3 hasn't declined in 2008 is B.S.
posted by ikkyu2 at 8:59 PM on December 11, 2008
That nutbar website that says that M3 hasn't declined in 2008 is B.S.
posted by ikkyu2 at 8:59 PM on December 11, 2008
Let's say you loan me $10. Then I set that money on fire and declare bankruptcy. If this is a zero-sum game, who has the $10 now?
All of the other dollars in the universe increase by a tiny amount in their actual buying power to balance out the $10 that was removed.
Money is NOT a zero sum game. It hasn't been for decades. Money is conjured into being when debt obligations are created to banks. This money then enters the system and is loaned out over and over again. Repeat over and over again. Money is debt. This is why subprime brought the house tumbling down, because when the debt disappeared, it sucked vast amounts of liquidity out of the system, which the govt is trying desperately to replace.
As everyone else says, so long as Treasury yields are near zero and in some cases negative, no new money is being printed. Deflation is much harder to cure than inflation. I'm sure the US gov would LOVE some inflation round about now, which would increase people's ability to repay debt, and reduce household debt in cash terms enormously (imagine if the dollar halved in value -- that $100,000 you owed the bank stays the same but your wage doubled).
posted by unSane at 9:11 PM on December 11, 2008
All of the other dollars in the universe increase by a tiny amount in their actual buying power to balance out the $10 that was removed.
Money is NOT a zero sum game. It hasn't been for decades. Money is conjured into being when debt obligations are created to banks. This money then enters the system and is loaned out over and over again. Repeat over and over again. Money is debt. This is why subprime brought the house tumbling down, because when the debt disappeared, it sucked vast amounts of liquidity out of the system, which the govt is trying desperately to replace.
As everyone else says, so long as Treasury yields are near zero and in some cases negative, no new money is being printed. Deflation is much harder to cure than inflation. I'm sure the US gov would LOVE some inflation round about now, which would increase people's ability to repay debt, and reduce household debt in cash terms enormously (imagine if the dollar halved in value -- that $100,000 you owed the bank stays the same but your wage doubled).
posted by unSane at 9:11 PM on December 11, 2008
When debts go bad and banks have to reel in capital, the money supply deflates.
How???
The money supply is what it is. Money supply GROWTH is falling according to the shadow gov stats site (chart), falling from 16% Y YOY to 8% YOY.
That nutbar website that says that M3 hasn't declined in 2008 is B.S.
I agree that it's a nutbar site but please tell me how M3 is going to DECLINE without the Fed selling its treasuries back to the US Treasury for retirement.
Money is conjured into being when debt obligations are created to banks.
Not necessarily, like when the bank funds a loan from a CDO issued to investors.
This is why subprime brought the house tumbling down, because when the debt disappeared, it sucked vast amounts of liquidity out of the system
People say these words like "liquidity" but I want to understand its real meaning and not its magic totem signifiier meaning that everyone is using.
Bank issues loans. Borrower gives cash to somebody, spending the loan. THAT somebody now has the money, while the borrower has a liability and the bank has an asset (the money loaned to the borrower). Borrower defaults, takes a hit on his FICO. Bank loses the asset.
Now here is the critical part -- depending on whether this loaned money was "conjured" into existence via a) fractional reserve lending or b) out of retained earnings or c) was some customer's checking account money.
So tough times for the bank -- it has to make its asset holders whole for the money it just lost --but the money that was loaned by the bank IS STILL IN THE ECONOMY SOMEWHERE.
So the liquidity loss here would be the bank becoming increasingly inable to extend more credit until it repairs its balance sheet. I understand that part. But it seems to me that the net liquidity in the system isn't impinged.
This is where the liquidity trap comes, when the banks that have money to lend cannot find borrowers for that money able to repay them.
posted by troy at 9:54 PM on December 11, 2008
How???
The money supply is what it is. Money supply GROWTH is falling according to the shadow gov stats site (chart), falling from 16% Y YOY to 8% YOY.
That nutbar website that says that M3 hasn't declined in 2008 is B.S.
I agree that it's a nutbar site but please tell me how M3 is going to DECLINE without the Fed selling its treasuries back to the US Treasury for retirement.
Money is conjured into being when debt obligations are created to banks.
Not necessarily, like when the bank funds a loan from a CDO issued to investors.
This is why subprime brought the house tumbling down, because when the debt disappeared, it sucked vast amounts of liquidity out of the system
People say these words like "liquidity" but I want to understand its real meaning and not its magic totem signifiier meaning that everyone is using.
Bank issues loans. Borrower gives cash to somebody, spending the loan. THAT somebody now has the money, while the borrower has a liability and the bank has an asset (the money loaned to the borrower). Borrower defaults, takes a hit on his FICO. Bank loses the asset.
Now here is the critical part -- depending on whether this loaned money was "conjured" into existence via a) fractional reserve lending or b) out of retained earnings or c) was some customer's checking account money.
So tough times for the bank -- it has to make its asset holders whole for the money it just lost --but the money that was loaned by the bank IS STILL IN THE ECONOMY SOMEWHERE.
So the liquidity loss here would be the bank becoming increasingly inable to extend more credit until it repairs its balance sheet. I understand that part. But it seems to me that the net liquidity in the system isn't impinged.
This is where the liquidity trap comes, when the banks that have money to lend cannot find borrowers for that money able to repay them.
posted by troy at 9:54 PM on December 11, 2008
Bank issues loans. Borrower gives cash to somebody, spending the loan. THAT somebody now has the money
No they don't. They either put it in the bank or spend it. If they spend it, whoever receives it puts it in the bank (or spends it.) Eventually it ends up in the bank. In that bank, it appears on the asset side of the balance sheet. Bank can then loan it out, again, except they hang onto the reserve requirement. That's fractional reserve banking, and you don't understand it.
If the original bank loses (writes down) $1 in assets, M3 shrinks by (1/R.R.) x $1. That's fractional reserve banking.
When it really gets fun is when one bank's Level 3 off-balance-sheet assets are used as assets/collateral, and then lending is done. Then it turns out the assets are worthless and get written down. THE MONEY IS NOT STILL IN THE ECONOMY SOMEWHERE, as you so charmingly put it above. In fact it never was; it was created out of whole cloth by crazy mark-to-model accounting and then used as the basis for lending out capital. When this occurs, the bank has to unwind some deals to get back into compliance with the reserve requirement. This has been what's happening, except that the unwinding has started to spill into nearly every part of the global economy.
posted by ikkyu2 at 11:18 PM on December 11, 2008
No they don't. They either put it in the bank or spend it. If they spend it, whoever receives it puts it in the bank (or spends it.) Eventually it ends up in the bank. In that bank, it appears on the asset side of the balance sheet. Bank can then loan it out, again, except they hang onto the reserve requirement. That's fractional reserve banking, and you don't understand it.
If the original bank loses (writes down) $1 in assets, M3 shrinks by (1/R.R.) x $1. That's fractional reserve banking.
When it really gets fun is when one bank's Level 3 off-balance-sheet assets are used as assets/collateral, and then lending is done. Then it turns out the assets are worthless and get written down. THE MONEY IS NOT STILL IN THE ECONOMY SOMEWHERE, as you so charmingly put it above. In fact it never was; it was created out of whole cloth by crazy mark-to-model accounting and then used as the basis for lending out capital. When this occurs, the bank has to unwind some deals to get back into compliance with the reserve requirement. This has been what's happening, except that the unwinding has started to spill into nearly every part of the global economy.
posted by ikkyu2 at 11:18 PM on December 11, 2008
In that bank, it appears on the asset side of the balance sheet
No, customer deposits are bank's liabilities. I know that much, LOL.
If the original bank loses (writes down) $1 in assets, M3 shrinks by (1/R.R.) x $1.
I thought M3 was money supply, not assets per se. Total assets in the US per the latest (out today in fact) Federal Flow of Funds report is over $50T, while M3 is estimated at $18T. Both are rather flat this year (credit assets only growing $1T so far this year, while during the boom times credit was growing at $3T/yr or more).
When it really gets fun is when one bank's Level 3 off-balance-sheet assets are used as assets/collateral, and then lending is done
I thought banks could only lend against Tier-1 capital and that's why they're trying to get their capital ratios up to 8% again (and why the TARP plan was changed to just inject capital directly in exchange for preferred shares).
Then it turns out the assets are worthless and get written down. THE MONEY IS NOT STILL IN THE ECONOMY SOMEWHERE
We have differeng views of accounting. I know very little about this other than what I've read on blogs over the past 3-odd years, but AFAIK assets are not money.
But you are correct that I don't understand fractional reserve lending and its relationship to money creation. Above I mentioned the 9:1 ratio of central bank money and money supply, but neglected to think through the reversal of this process -- when we repay loans the 9:1 leverage of the fractional reserve lending is reversed and the money the bank receives from me reduces the asset they hold.
I guess when I default on the loan money supply is in fact reduced since the bank has to divert its own resources -- either retained earnings or new capital -- to make whole its depositor(s) whose account(s) this money was taken from to lend to me.
posted by troy at 1:28 AM on December 12, 2008
No, customer deposits are bank's liabilities. I know that much, LOL.
If the original bank loses (writes down) $1 in assets, M3 shrinks by (1/R.R.) x $1.
I thought M3 was money supply, not assets per se. Total assets in the US per the latest (out today in fact) Federal Flow of Funds report is over $50T, while M3 is estimated at $18T. Both are rather flat this year (credit assets only growing $1T so far this year, while during the boom times credit was growing at $3T/yr or more).
When it really gets fun is when one bank's Level 3 off-balance-sheet assets are used as assets/collateral, and then lending is done
I thought banks could only lend against Tier-1 capital and that's why they're trying to get their capital ratios up to 8% again (and why the TARP plan was changed to just inject capital directly in exchange for preferred shares).
Then it turns out the assets are worthless and get written down. THE MONEY IS NOT STILL IN THE ECONOMY SOMEWHERE
We have differeng views of accounting. I know very little about this other than what I've read on blogs over the past 3-odd years, but AFAIK assets are not money.
But you are correct that I don't understand fractional reserve lending and its relationship to money creation. Above I mentioned the 9:1 ratio of central bank money and money supply, but neglected to think through the reversal of this process -- when we repay loans the 9:1 leverage of the fractional reserve lending is reversed and the money the bank receives from me reduces the asset they hold.
I guess when I default on the loan money supply is in fact reduced since the bank has to divert its own resources -- either retained earnings or new capital -- to make whole its depositor(s) whose account(s) this money was taken from to lend to me.
posted by troy at 1:28 AM on December 12, 2008
The question is flawed. There was one bailout, for less than a trillion dollars, handed out with conditions. This was a very good thing for our economic stability. Yesterday, horrible GOP republicans voted not to bail out the auto industry, in a transparent attempt to destroy the UAW union, and maybe to purposely make the economy even worse so they have a better chance in the 2010 and 2012 elections.
The U.S. economy will recover, just like it always has, for the same reasons it always has. You have the burden of proof on the wrong side when you phrase a question as, "Why will the current situation not be like one very specific historical event in a different country 80 years ago?"
There is zero evidence that it will, except empty "lol us sucks amirite?" conjecture.
posted by drjimmy11 at 8:31 AM on December 12, 2008 [1 favorite]
The U.S. economy will recover, just like it always has, for the same reasons it always has. You have the burden of proof on the wrong side when you phrase a question as, "Why will the current situation not be like one very specific historical event in a different country 80 years ago?"
There is zero evidence that it will, except empty "lol us sucks amirite?" conjecture.
posted by drjimmy11 at 8:31 AM on December 12, 2008 [1 favorite]
Money is destroyed. Much of the money supply is theoretical, that is, not backed by actual currency. It is carried on balance sheets. Holders of debt value themselves based on the current value of future payments. They sell stock and other instruments based on these values and take that money and spend it.
But when the money doesn't get repaid, it means the assets the debt holders thought they had is not valued as they thought it was.
A good example is a house which was valued at $ 500,000 losing value to $400,000. Demand for housing has gone down, but the asset remains. Thus, the $100,000 lost is destroyed if the house is foreclosed on. The house only sells for $400,000. That $100,000 is gone. It doesn't exist anymore. All of the assumptions based on that value are wrong. The money is irrevocably gone.
posted by Ironmouth at 10:45 AM on December 12, 2008
But when the money doesn't get repaid, it means the assets the debt holders thought they had is not valued as they thought it was.
A good example is a house which was valued at $ 500,000 losing value to $400,000. Demand for housing has gone down, but the asset remains. Thus, the $100,000 lost is destroyed if the house is foreclosed on. The house only sells for $400,000. That $100,000 is gone. It doesn't exist anymore. All of the assumptions based on that value are wrong. The money is irrevocably gone.
posted by Ironmouth at 10:45 AM on December 12, 2008
People say these words like "liquidity" but I want to understand its real meaning and not its magic totem signifiier meaning that everyone is using.
It means an asset that can be turned to cash within a short period of time. That includes cash. It's not a magical totem signifier. That's just a long way of saying you need to read some stuff.
Bank issues loans. Borrower gives cash to somebody, spending the loan. THAT somebody now has the money, while the borrower has a liability and the bank has an asset (the money loaned to the borrower). Borrower defaults, takes a hit on his FICO. Bank loses the asset.
No, that's how you THINK it works. That's how banks want you to think it works. It hasn't worked that way for decades, or at least that's just the tail end of how it works. When you sign a debt obligation like a mortgage, that CREATES money, just as when the govt signs a debt obligation like a T-bill, that CREATES money. This is what a fiat currency is.
posted by unSane at 7:33 PM on December 12, 2008
It means an asset that can be turned to cash within a short period of time. That includes cash. It's not a magical totem signifier. That's just a long way of saying you need to read some stuff.
Bank issues loans. Borrower gives cash to somebody, spending the loan. THAT somebody now has the money, while the borrower has a liability and the bank has an asset (the money loaned to the borrower). Borrower defaults, takes a hit on his FICO. Bank loses the asset.
No, that's how you THINK it works. That's how banks want you to think it works. It hasn't worked that way for decades, or at least that's just the tail end of how it works. When you sign a debt obligation like a mortgage, that CREATES money, just as when the govt signs a debt obligation like a T-bill, that CREATES money. This is what a fiat currency is.
posted by unSane at 7:33 PM on December 12, 2008
so we aren't printing new money -- posted by nomisxid at 6:02 PM on December 11
Aren't we?
posted by woodway at 7:23 AM on December 18, 2008
Aren't we?
posted by woodway at 7:23 AM on December 18, 2008
This thread is closed to new comments.
posted by TheRaven at 4:01 PM on December 11, 2008