Say Goodbye to Your Retirement and 401K

[Master Shake]

Re: Say Goodbye to Your Retirement and 401K

Aren't defaults inflationary? All that money that would have been paid back to the bank (destroyed) is now left in the economy. I know I have a lot more money to spend than before.

If there is no money to pay back the bank and you default, how can that money still exist in the economy?

[radon]

Re: Say Goodbye to Your Retirement and 401K

Aren't defaults inflationary? All that money that would have been paid back to the bank (destroyed) is now left in the economy. I know I have a lot more money to spend than before.

You realize that loan was an asset on the banks balance sheet, and that the money you are talking about (left in the economy) is electronic and in bank accounts?

[ASH]

Re: Say Goodbye to Your Retirement and 401K

If THAT's the best you got ASH, I'd suggest it's REALLY time for you to pour through those 77 pages. (I think you'll find all the above points CONTRADICTED by historical example).

Hence my claim "It's NOT different, this time".

JT -- Why don't you take a moment to write a paragraph or two that explains your point.

[wayiwalk]

Re: Say Goodbye to Your Retirement and 401K

Actually, George Miller from California has proposed the take over of 401(k)'s by the gov't for several years.

This is nothing new, and considering how the country's finances look, why would you be surprised.

I suppose the following site is somewhat "ranty", but anybody fact check any of this? http://www.lewrockwell.com/holland/holland12.1.html

If the SEIU is behind this "idea", I'd like to know if anybody has had a decent auditor check their books for their pension plan and see if all contributions that have been claimed to be made have actually been made.....just wondering, that's all.:rolleyes:

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

JT -- Why don't you take a moment to write a paragraph or two that explains your point.

Tell you what.

I'll make a deal with you.

YOU read ALL 77 pages tonight, and if you are still unclear, I will do my best to answer the above points in as much detail as I can.

Fair?

[ASH]

Re: Say Goodbye to Your Retirement and 401K

Aren't defaults inflationary? All that money that would have been paid back to the bank (destroyed) is now left in the economy. I know I have a lot more money to spend than before.

You are right that repayment of the debt would destroy the money which was created by issuing the loan. However, when the debt is defaulted upon, it subtracts from the bank's capitalization. This is deflationary, because leverage also works in reverse: a hit to capital decreases the amount of credit that the bank can extend in proportion to its effective reserve fraction ratio. Repayment of the loan only destroys an amount of money equal to the value of the loan; default on the loan will force the bank to withdraw several times the value of the loan in credit, assuming that the bank is pressing up against the reserve fraction limit.

An ancillary point is that credit created by one bank and spent by a borrower becomes a deposit at another bank... which can subsequently leverage loans against that deposit. Neither default nor repayment of the original loan directly affect the deposit at the other bank, nor do they recall the "daughter loans" made against that deposit. In this sense, once the money created by issuance of credit is spent, it is indeed loose in the economy and cannot be recalled.

However, this does not mean that default is inflationary. The money that was spent is out there running loose anyway, regardless of whether the original loan is repaid or defaulted upon. However, the amount that can be lent in 'daughter' loans is limited by a converging series. Iteration of reserve fraction lending results in a larger ratio of credit money to reserves than the simple reserve fraction, but it is not limitless. The point as regards inflation or deflation is that this extra lending happens whether or not the original loan is repaid or defaulted upon... the inflationary part of this has already occured at the point where the original loan defaults or is repaid. The impact of default upon the original lender's capital is such that the net result is deflationary, notwithstanding the fact that the money spent from that loan is still in the economy.

[ASH]

Re: Say Goodbye to Your Retirement and 401K

Tell you what.

I'll make a deal with you.

YOU read ALL 77 pages tonight, and if you are still unclear, I will do my best to answer the above points in as much detail as I can.

Fair?

No offense, but it isn't fair. You clearly have read through that document, and thought about what it says. It would take what -- ten minutes of your time to address my points yourself directly, or to summarize what you think that document demonstrates.

As far as I can tell, the history of the assignat is an example of a government creating money in order to spend it, which led to a classical positive feedback loop. I don't see how that relates to the arguments I'm making. If, instead, the assignats had been used to stabilize the capitalization of commercial banks, and had not been spent by the French government, the comparison would make more sense.

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

No offense, but it isn't fair. You clearly have read through that document, and thought about what it says. It would take what -- ten minutes of your time to address my points yourself directly, or to summarize what you think that document demonstrates.

As far as I can tell, the history of the assignat is an example of a government creating money in order to spend it, which led to a classical positive feedback loop. I don't see how that relates to the arguments I'm making. If, instead, the assignats had been used to stabilize the capitalization of commercial banks, and had not been spent by the French government, the comparison would make more sense.

Respectfully, ALL I am trying to point out is that I think you would have your answers if your read the doc (if you open it up you will see that you can read it in less than 1 hour, I did, and I ain't as smart as you is).

That's all.

I'm really good at big picture stuff, to the point that I suffer on details but not to the point where I've changed the meaning, or missed the intent. I really don't want to be responsible for failing to communicate effectively to you. I'm very much "the source document rules" kind of guy.

I'm not trying to be evasive, but I don't want to get things right "in general" but leave out some detail that is CRITICAL to your opinion on the matter.

You have to be REALLY careful when you ask someone to change their mind. You can show them where to go, but you can't take them there yourself. Otherwise, they are just memorizing, not learning anything.

I hope I'm not pissing you off. I just want to make sure that you read it and see it as YOU see it, not how I see it. Fuck, I could be wrong for all I know. I don't think I am, but the hallmark of a thinking person is that they form an opinion based on the evidence, but then are capable of CHANGING their opinion if the evidence changes or new evidence is presented.

What I'm indelicately trying to say is:

Morpheus: Ash, sooner or later you're going to realize just as I did that there's a difference between knowing the path and walking the path.

Okay, that last part was just to keep you on your toes, but I hope you get my gist.

[ASH]

Re: Say Goodbye to Your Retirement and 401K

The result of the Fed exchanging newly printed money for bad assets with the banks is not a net-net operation. What you have to consider is that much of those "bad" assets are leveraged or in other words were originally paid for with credit. As the value of these securities collapses due to defaults and declines in the value of the underlying secured assets, the credit to purchase the security would simply be written off like any other loan gone bad. The problem is that the Fed is trading HARD CURRENCY for credit, hence everyone's concern about the $1 trillion in reserves the banks have sitting with the Fed.

Thanks for the discussion, bcassill.

I think that when a bank writes off a bad asset 'like any other loan gone bad' -- or indeed writes off a loan gone bad -- it takes the full hit to its capital. In the sense of recapitalizing banks so they don't go under and still have the capacity to lend, I think there is a one-to-one correspondence between the negative impact of a bad loan or asset and the positive impact of the reserves created by the Fed and paid for a bad asset. You are, of course, correct that a bank can't directly leverage an asset the same way it can reserves on deposit with the Fed, so replacing a $1M asset with $1M of reserve deposits stores up mischief for the future. (On the other hand, money created as credit by one bank can become a deposit at another bank when it is spent, so there is somewhat closer parity between base money and credit than one might suppose.) That said, I think there is plenty of opportunity here for policy overshoot; the Fed will most definitely need to mop up reserves once banks stop taking such high losses on bad loans, and start extending more credit. However, my point is that inflation doesn't constrain the Fed's ability to monetize bad assets to prop up banks, because the circumstances which require this monetization policy are exactly the same circumstances which prevent a lot of lending against the reserves created. (Fear of inflation does constrain the quantity of government bonds that the Fed can monetize.)

Your last paragraph is only partially true. As a rule, Wall Street firms cannot use or borrow against 401K and pension funds for speculative investment purposes like they can with something like Money Market accounts which firms used for short term liquidity in the past (this is how off balance sheet entities like SIV's were financed: borrow short term from the money markets and buy long term higher yield mortgage securities all the while using the commercial paper market to roll over your short term debt over and over). Essentially, the plan under discussion has raised it's ugly head in many guises from a voluntary program of rolling part of your 401K into US Treasuries to cooked up schemes like this that would essentially allow the government to use your hard earned savings for various programs to "support" market operations via the Fed and U.S. Treasury much like they are already doing with the printing press. You get an IOU, they get your money, and the Wall Street fat cats continue to get their subsidized bonuses courtesy of you, the tax payer. :eek::mad:

Thanks for those observations. I hadn't considered the tie-in to access to speculative capital.

[ASH]

Re: Say Goodbye to Your Retirement and 401K

Respectfully, ALL I am trying to point out is that I think you would have your answers if your read the doc (if you open it up you will see that you can read it in less than 1 hour, I did, and I ain't as smart as you is).

That's all.

I'm really good at big picture stuff, to the point that I suffer on details but not to the point where I've changed the meaning, or missed the intent. I really don't want to be responsible for failing to communicate effectively to you. I'm very much "the source document rules" kind of guy.

I'm not trying to be evasive, but I don't want to get things right "in general" but leave out some detail that is CRITICAL to your opinion on the matter.

You have to be REALLY careful when you ask someone to change their mind. You can show them where to go, but you can't take them there yourself. Otherwise, they are just memorizing, not learning anything.

I hope I'm not pissing you off. I just want to make sure that you read it and see it as YOU see it, not how I see it. Fuck, I could be wrong for all I know. I don't think I am, but the hallmark of a thinking person is that they form an opinion based on the evidence, but then are capable of CHANGING their opinion if the evidence changes or new evidence is presented.

What I'm indelicately trying to say is:

Morpheus: Ash, sooner or later you're going to realize just as I did that there's a difference between knowing the path and walking the path.

Okay, that last part was just to keep you on your toes, but I hope you get my gist.

Thanks JT. I'll do as you suggest, read the article, and get back to you.

[vinoveri]

Re: Say Goodbye to Your Retirement and 401K

Thanks JT. I'll do as you suggest, read the article, and get back to you.

I hope you will get back to us all with your opinion on the piece and continue the debate; this is an important and frankly confounding issue, but I must admit I have been thinking more like you describe in that if bad debts, caused by decline in asset values, can simply be "written off" from the debtor, and creditor made whole or almost whole with new created money from the FEd, the net effect is not inflationary, but rather anti-deflationary or stabilizing to asset values IMO.


Our economy is based on consumption, and consumption demand drives production growth. Incomes don't grow fast enough to sustain a consumption driven growth, so credit is invoked and distributed to everyone (from hedge funds to credit card holders) to fuel the consumption growth, and everyone gets to buy, and everyone gets to sell, and we have a growing economy based on debt. Then, the inablity to service the debt moment arrives and just when we are about to go into a deflationary death spiral, the Fed pulls out its bag of magic and says abracadabra, we are going to write off a lot of that debt by creating the money to pay off the existing debt, i.e., to pay for those assets and goods that have already been created; so there is not more money, chasing fewer goods; rather there is just enough money to prevent those good and assets from getting cheaper. Once we're through this cycle, they will try to do it again ... boom and controlled bust all the while maintaining CONfidence of the people. This time however, are foreign creditors got burned and are probably not up for another full creditor financed debt boom.

What I don't understand is the concept of "the Fed's balance sheet" and the implications for its size. Before the crisis the Fed bs was ~$900Billion or so with the equivalent amount of FRNotes in circulation. Now that it has $2.2T and a lot of MBS, what impact does this have at all? Why can't the Fed expands its BS to $3T or $50T? It's all just accounting it seems, neat and orderly, until they need to take care of the toxic assets, which they do by putting of the Fed's BS (read: sweep under the rug).

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

Why can't the Fed expands its BS to $3T or $50T? It's all just accounting it seems, neat and orderly, until they need to take care of the toxic assets, which they do by putting of the Fed's BS (read: sweep under the rug).

It's called spill-over and you are already seeing it in almost every consumer consumable (food, energy, toilet paper, cat food). Non-consumables, not so much unless they are imported, and in that case, you see it. Food is the worst right now, but all those "other things" that we purchase and consume in our daily lives are all being affected. The FED tries to pretend, or rather INTENTIONALLY FOSTERS THE FALLACY that there is a "Brick Wall" between liquidity creation and inflation.

There is always leakage, and that leakage is accelerating. Don't believe me. Read any of EJ articles on the LACK of DEFLATION.

My guess that the spill-over effect on CONSUMABLE GOODS prices is upwards of 50% over the last 6 months. I Fully expect to see in excess of 100% over the next 3 months. Price doubles, time period halves, it doesn't take long at that pace for things to get UGLY quickly. (Esp since economic activity will CONTINUE to decrease. Gross sales up, volume down, hallmark of any hyper-inflationary depression). Watch for it, and I'm telling you so in advance to save me from having to say "I told you so" in the future.

V/R

JT

[vinoveri]

Re: Say Goodbye to Your Retirement and 401K

It's called spill-over and you are already seeing it in almost every consumer consumable (food, energy, toilet paper, cat food). Non-consumables, not so much unless they are imported, and in that case, you see it. Food is the worst right now, but all those "other things" that we purchase and consume in our daily lives are all being affected. The FED tries to pretend, or rather INTENTIONALLY FOSTER THE FALLACY that there is a "Brick Wall" between liquidity creation and inflation.

There is always leakage, and that leakage is accelerating. Don't believe me. Read any of EJ articles on the LACK of DEFLATION.

My guess that the spill-over effect on CONSUMABLE GOODS prices is upwards of 50% over the last 6 months. I Fully expect to see in excess of 100% over the next 3 months. Price doubles, time period halves, it doesn't take long at that pace for things to get UGLY quickly. (Esp since economic activity will CONTINUE to decrease. Gross sales up, volume down, hallmark of any hyper-inflationary depression). Watch for it, and I'm telling you so in advance to save me from having to say "I told you so" in the future.

V/R

JT

JT, I appreciate your insights.
I agree that the Fed fosters a number of fallacies bordering on outright deception and manipulation, and I will agree that there is "leakage" as you put it; cannot this be viewed though as merely an imperfect application or inherent "play" in the larger system. The Fed has prevented the deflation spiral with the liquidity provided to retire debts; price levels are indeed too high IMO for energy, food, and other necessaries, but prices for all these have been going up over the past several years (remember the spike in commodities in early 2008); now they are not as high, but still high, and creeping back up (is this the leakage you mean?); but I think the Fed would be happy with 5-7% real inflation as long as they can keep the core CPI reported <3%. Still don't understand why 5-7% inflation must turn into runaway inflation though as long as the dupe meisters continue to spew their disinformation and we the masses are brought to a boil gradually. I thimk PM will ultimately outperform equities and paper, and am long 25% assets there, but am just not so sure this will happen anytime soon.

As far as EJ, his latest comment seems to me to support the neither deflation nor rampant inflation view.
http://www.itulip.com/forums/showthr...t=14836&page=4 p#76


VV

[bcassill]

Re: Say Goodbye to Your Retirement and 401K

Our economy is based on consumption, and consumption demand drives production growth. Incomes don't grow fast enough to sustain a consumption driven growth, so credit is invoked and distributed to everyone (from hedge funds to credit card holders) to fuel the consumption growth, and everyone gets to buy, and everyone gets to sell, and we have a growing economy based on debt.

You got the debt drives consumption side of the equation, but you are missing the role of credit in speculative finance. Remember that the American financial system has almost as much debt as all of the business and consumer debt combined. That money was not used to consume in order to drive production of goods and services. It was used to speculate via leverage (i.e. you buy an investment with a little of your own money and a lot of borrowed money). I'll give you an example, not long ago I read about a commercial real estate project that had gone bust, a huge skyscraper. The entire building had cost $3 - $3.5 billion to build. The investment group put in only about $60 million of their own money. They borrowed about $50 for every dollar they put into the deal: a leverage ratio of 50:1. It was insane. When the project went bust, they just walked away. This sort of scheme was used to buy up all kinds of "assets" from companies, to consumer debt, to mortgage backed securities. When asset values are climbing you can make a killing using leverage like this, but you take it in the seat of the pants when things go bust. It was precisely this issue that caused the implosion of Bear Stearns, Lehman, and Merrill Lynch. Goldman Sachs had similar problems, but their connections were a little better.

What I don't understand is the concept of "the Fed's balance sheet" and the implications for its size. Before the crisis the Fed bs was ~$900Billion or so with the equivalent amount of FRNotes in circulation. Now that it has $2.2T and a lot of MBS, what impact does this have at all? Why can't the Fed expands its BS to $3T or $50T? It's all just accounting it seems, neat and orderly, until they need to take care of the toxic assets, which they do by putting of the Fed's BS (read: sweep under the rug).

The problem with the Fed is that most of what they are doing is a closely guarded secret known only to a few well connected insiders. As the law currently stands, they are accountable to no one except their shareholders (who happen to be the major banks) as long as they stay within their legal mandate. Now as you can imagine, there's all kinds of ways to twist the law to make their actions "legal." One of these is their purchasing of Treasury Bills in order to monetize the U.S. deficit. By law, they are not allowed to purchase T-Bills directly from the Treasury. They have to purchase them on the "open market" which basically means buying the T-Bills from a primary dealer like Goldman Sachs. Basically, Goldman Sachs would buy a boatload of T-Bills from the Treasury and then turn right around and resell them to the Fed for a pile of freshly printed money. Sometimes this transaction would happen in as little as 30 minutes from Treasury to Goldman to Fed. It is all technically legal, but no one is happy about it.

The problem ultimately is that inflation is driven by the excess availability of money relative to the real economy's ability to productively utilize it. This is the reason why when governments like Zimbabwe print bills with 9 zeroes on them, the currency essentially becomes worthless. But you also have to consider how the money supply works. $1 in the base money supply (i.e. that created by the government) can create up to $9 in new money via bank lending. This essentially puts an upper limit on how much money can be in circulation at any one point. However, the Fed is replacing losses in credit created money with hard currency they've printed thereby increasing the overall base money supply. Right now, it's not much of a problem, because no one is lending. But it may be different story in 5 or 10 years and all that extra money floating around out there can generate a ton of new credit which would be very inflationary indeed.

So, we've got a conundrum. The Fed can only print so much money and the American tax payer is ultimately on the hook for any "losses" the Fed might incur. Just remember, they have a balance sheet just like any other commercial bank. It would truly suck if we had to pay for their brilliant decision making.

[vinoveri]

Re: Say Goodbye to Your Retirement and 401K

You got the debt drives consumption side of the equation, but you are missing the role of credit in speculative finance. Remember that the American financial system has almost as much debt as all of the business and consumer debt combined. That money was not used to consume in order to drive production of goods and services. It was used to speculate via leverage (i.e. you buy an investment with a little of your own money and a lot of borrowed money). I'll give you an example, not long ago I read about a commercial real estate project that had gone bust, a huge skyscraper. The entire building had cost $3 - $3.5 billion to build. The investment group put in only about $60 million of their own money. They borrowed about $50 for every dollar they put into the deal: a leverage ratio of 50:1. It was insane. When the project went bust, they just walked away. This sort of scheme was used to buy up all kinds of "assets" from companies, to consumer debt, to mortgage backed securities. When asset values are climbing you can make a killing using leverage like this, but you take it in the seat of the pants when things go bust. It was precisely this issue that caused the implosion of Bear Stearns, Lehman, and Merrill Lynch. Goldman Sachs had similar problems, but their connections were a little better.

When the debt implodes though, say when MBS start to stink, and the hedge fund/bank can't roll over the debt to refinance or sell to a greater fool the security, what should happen is levered party defaults, and if this happens enough in a cascading fashion, ultimately, the issuer of the debt is going to be holding the bag/insolvent. But since these banks can create debt via fractional reserve banking, all the fed needs to do is take the junk assets off the bank's books (making the bank technically solvent) AND lend the bank reserves (via the fed funds rate for instance), the bank can then lend long to the UST or speculate in riskier assets, and work its way out of insolvency on its own. I think this is precisely why the fed funds will stay near 0% and the Volcker rule will never happen. Free money for the banks to "carry trade" themselves back to solvency over the years, and "hopefully", asset values will recover to some extent, and the fed can ultimately sell the former toxic assets (which are not as bad anymore) back to the re-capitalized banks.

.
So, we've got a conundrum. The Fed can only print so much money and the American tax payer is ultimately on the hook for any "losses" the Fed might incur. Just remember, they have a balance sheet just like any other commercial bank. It would truly suck if we had to pay for their brilliant decision making.

I suppose this is the part I don't get; that the fed's balance sheet has some actual meaning like a commercial company. When someone says that FR notes are liabilities of the Fed, I just don't get that. What is the Fed liable for if I present them with a FRN? To me it looks like a smoke and mirrors CONfidence game that, as you say, nobody can quite figure out, b/c of all the secrecy and "complexity" of the FR system. Americans are required by law to accept FRNs for public and private debts; the rest of the world is not.

Here's a timely and somewhat relevant PR:http://www.bloomberg.com/apps/news?p...uo6gnEQo&pos=5

Banks being subsidized to forgive debt; overindebted consumer has his debt forgiven by banks which are made whole by the Treasury. And of course we know where the UST will go if it need money, and that is the FED with its expandable unaccountable balance sheet.