Say Goodbye to Your Retirement and 401K

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

They understand that fractional reserve lending can amplify the total money in the system by a very large factor relative to the supply of reserves, but they forget that a drop in reserves also has a leveraged impact upon the amount of credit that can be extended.

First, there is essentially zero reserve requirement (e.g. 10% is like gold standard antiquity, or at least pre-FIRE).

Second, we have a nice little chicken, egg and chicken omlette problem that you just posited. (Not sure if it was intentional or not).

So the question that suggests itself is:

Are banks not actively lending because:

A) De-leveraging is causing a contraction in capital adequacy.

or

B) Because they can earn RISK FREE RETURNS on excess reserves.

or

C) A combination of A & B


I don't know.

I do knowthat the $64 Trillion Dollar question is:

Does the Fed WANT banks to lend?

and further,

Do the Fed's policy actions taken so far suggest an ANSWER to the above question?

Subsets of this question are:

1.Does the Fed want lending in the FIRE sphere?

2.Does the Fed want lending in the Production/Consumption sphere?

What Fed policy actions could we examine to try to determine an answer to all of these questions?

I have an answer on a HUNCH. It comes from an insight from Hudson.

P-C Sphere Deflation is desired. (Much better to mask peak-oil symptoms with than a raging P-C sphere inflation).

As an aside, anyone else notice that their gasoline now contains up to 10% ethanol? My gas mileage has dropped by roughly 6% (About right because ethanol has about 60% of the energy content of gasoline by volume)

FIRE Inflation is desired.

I think that he is correct in is supposition about the Fed's motivation, though thinking and proving are two VERY different things.

NONE of this is to say that the Fed CAN'T change their objective, the question is, will they?

EJ wrote an article a while back called "Everyone is wrong, again – 1981 in Reverse" where he argues (successfully, IMHO) that the fed will inflate assets until it dies, the economy recovers or the dollar is destroyed and further that the markets doubt the Fed's veracity to do so.

http://www.itulip.com/forums/showthread.php?t=9704

He may have changed his mind, or he may have access to new information due to his new role as a policy adviser. In either case, he has not publicly updated his position on this issue so we are left guessing.

I for one, think Ben S. meant every word he said in his "helicopter" speech, including the part about "helicopters". (esp black ones)

[ThePythonicCow]

Re: Say Goodbye to Your Retirement and 401K

P-C Sphere Deflation is desired. (Much better to mask peak-oil symptoms with than a raging P-C sphere inflation).

The suggestion that our financial elite are trying to mask peak-oil symptoms doesn't ring true to me. It makes it sound like they are trying to be nice to us and cushion the blow to us from some economic difficulties. Aw shucks, isn't it nice their looking out for us ?

I suspect they are more interested in cushioning the blow to themselves from the shift in oil economics.

[ThePythonicCow]

Re: Say Goodbye to Your Retirement and 401K

As for myself, I don't doubt the veracity of the Fed on ANYTHING.

I suspect your logic get wired backwards in this sentence.

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

The suggestion that our financial elite are trying to mask peak-oil symptoms doesn't ring true to me. It makes it sound like they are trying to be nice to us and cushion the blow to us from some economic difficulties. Aw shucks, isn't it nice their looking out for us ?

I suspect they are more interested in cushioning the blow to themselves from the shift in oil economics.

Who knows Cow, maybe the impact is bad enough now that their only choice is to contract the economy, or maybe it's agenda driven, or maybe it's beyond their control.

Point is big fish know, little fish stay in the dark and grasp at flickers of light.

All we are doing is grasping. That's all the information will allow us to do.

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

I suspect your logic get wired backwards in this sentence.

You and I have to stop meeting up like this. People will start to think we have "a thing".:p

Fixed, BTW.

Thanks

[ThePythonicCow]

Re: Say Goodbye to Your Retirement and 401K

You and I have to stop meeting up like this. People will start to think we have "a thing".:p

Nah - you're not my type.

[ASH]

Re: Say Goodbye to Your Retirement and 401K

First, there is essentially zero reserve requirement (e.g. 10% is like gold standard antiquity, or at least pre-FIRE).

That's quite true. Solvency is more often the constraining factor than regulation during deleveraging. After all, solvency is the ultimate arbiter of capital adequacy, and the amount of capital a bank needs on hand to satisfy the demands of its depositors and creditors depends a lot upon the economic environment. The laxity of modern reserve fraction requirements actually tends to increase the amount of money which is withdrawn from circulation during deleveraging, rather than decrease it. The contraction of the money supply in response to loan defaults would only be determined by the reserve fraction ratio if (a) the bank started out fully leveraged to the limit allowed by law, and (b) the bank thought that the regulatory minimum was all it would need to have on hand, given the economic environment. However, if the bank was conservative and didn't employ much leverage, it could support the same level of lending following a loan default despite having written off the loss from its capital. On the other hand, if the bank had leveraged to the hilt during a period when a lot of iffy loans had been issued, it will likely need to raise its capital and cut its liabilities by a larger amount than the law requires, just to stay solvent. The more lax the statutory reserve requirements, the more credit which must be withdrawn when loans default.

Second, we have a nice little chicken, egg and chicken omlette problem that you just posited. (Not sure if it was intentional or not).

Does it make sense to think about money creation from an initial reserve deposit in terms of recursion? It's not actually circular like a chicken/egg question, but it is a recursive tree... and default or repayment of a loan at one level of the recursion doesn't extinguish money lent into existence at deeper levels of the recursion. On the other hand, because the recursive series converges to a finite sum, repayment at every level would return the system to its initial condition (except there would be net accumulated debt from the interest). And the leverage employed at each level of the recursion -- and in neighboring recursive trees associated with other deposits and loans -- is a matter of choice for the banks involved, so during deleveraging, banks can choose to withdraw more credit than regulations require in order to stay solvent.

So the question that suggests itself is:

Are banks not actively lending because:

A) De-leveraging is causing a contraction in capital adequacy.

or

B) Because they can earn RISK FREE RETURNS on excess reserves.

or

C) A combination of A & B

Option C makes sense to me.

I have an answer on a HUNCH. It comes from an insight from Hudson.

P-C Sphere Deflation is desired. (Much better to mask peak-oil symptoms with than a raging P-C sphere inflation).

As an aside, anyone else notice that their gasoline now contains up to 10% ethanol? My gas mileage has dropped by roughly 6% (About right because ethanol has about 60% of the energy content of gasoline by volume)

FIRE Inflation is desired.

I think that he is correct in is supposition about the Fed's motivation, though thinking and proving are two VERY different things.

Those observations provide a lot of food for thought. I'm positive that the Fed wants asset price inflation. Have to chew on P-C deflation as a policy objective.

[radon]

Re: Say Goodbye to Your Retirement and 401K

It turned something unspendable (and frankly worth cents on the dollar... ) to money. Cash spent into the economy, all else being equal , will cause prices to go up.

The cash was already in the economy. How do you think the investor purchased the asset to begin with?

And now, after intervention, he has no more money than he had in the first place, and no additional money to buy the asset at a price that is higher than the backstop. For inflation to occur you now need to get some more money from somewhere.

So, let's say you have some piece of paper (MBS,bond,loan, whatever) that you own. Then for whatever reason, its value drops 90%. Sure, you could take your 10 cents on the dollar and run. Perhaps you would even be smart and buy an oil tanker or gold mine and never touch paper again.

Or, the Fed offers to buy your paper back for 100 cents on the dollar. Only a fool would say no. And only a fool would turn around and buy more MBS with it..

This is exactly why backstopping an asset like this does not produce inflation.

[radon]

Re: Say Goodbye to Your Retirement and 401K

That was not the intended implication, I'm pretty sure.

I'm no longer reading this particular thread closely (my "big picture" opinion is this hydraulic analysis of monetary flows is a misleading distraction at this point), but I presume "made whole" means something like "got out what he put in" In an illiquid or falling market, that could be quite a bit more than the current sale value.

It would have to be otherwise the investor is not made whole but has to take a loss. In the "made whole" example the investor makes no profit whatsoever. How is that inflationary?

An illiquid or falling market is deflationary as deleveraging forces people to liquidate assets to meet debt obligations. Without a backstop in this example you have a self reinforcing deflationary spiral.

[aaron]

Re: Say Goodbye to Your Retirement and 401K

It would have to be otherwise the investor is not made whole but has to take a loss. In the "made whole" example the investor makes no profit whatsoever. How is that inflationary?
.

Money trapped in a bond does not flow through the economy with its magical multiplier effect. By making the investor whole, the government gives them ca$h for their toxic paper. That cash can now be used to purchase things (again, real estate, cars, gold, hookers, what have you). In a more stable situation (economically and emotionally), the investor might turn around and buy a government or corporate bond - and yes this is happening to an extent - but I think after being burnt so badly, they will be more inclined to buy something tangible.

[radon]

Re: Say Goodbye to Your Retirement and 401K

Money trapped in a bond does not flow through the economy with its magical multiplier effect. By making the investor whole, the government gives them ca$h for their toxic paper. That cash can now be used to purchase things (again, real estate, cars, gold, hookers, what have you). In a more stable situation (economically and emotionally), the investor might turn around and buy a government or corporate bond - and yes this is happening to an extent - but I think after being burnt so badly, they will be more inclined to buy something tangible.

Ok, but none of that is inflationary. Asset prices are not higher and there isn't suddenly more money in circulation. Those investors could have bought just as many hookers before they bought the MBS as after they sold them.

[aaron]

Re: Say Goodbye to Your Retirement and 401K

Ok, but none of that is inflationary. Asset prices are not higher and there isn't suddenly more money in circulation. Those investors could have bought just as many hookers before they bought the MBS as after they sold them.

Perhaps a Wall Street hooker will accept an MBS certificate for services rendered but in the rest of the world they like cash.