Mega has a question

[Mega]

Ref "QE2"

It is said the FED will "QE" by $500 Billion to $2 Trillion......i am told that what they likey do is buy Home loans from the banks @ 100c on the $. Now forget the rights & wrongs why would this flation?

Fed buys the assets, puts them on their balance sheet.....banks sell assets & puts the cash on their balance sheet. Ok If its $2 trillion thats a lot, but i can't see where the velocity comes from.......?

Cheers
Mike

[BillBoard]

Re: Mega has a question

Ref "QE2"

It is said the FED will "QE" by $500 Billion to $2 Trillion......i am told that what they likey do is buy Home loans from the banks @ 100c on the $. Now forget the rights & wrongs why would this [cause in]flation?

Mike, what a wonderful question, but it is a bit tricky to answer because you have to understand debt-as- money down to its basic core. The basic answer boils down to making available currency units that are not being debt serviced in the economy with goods and services. I think an illustration or example could be helpful here.

Fed buys the assets, puts them on their balance sheet.....banks sell assets & puts the cash on their balance sheet. Ok If its $2 trillion thats a lot, but i can't see where the velocity comes from.......?

Cheers
Mike

You must be able to tell the difference between coin, note, and demand deposits as currency Mike.

For example, think of a barren economy with no currency what so ever.

If you mint 1000 coins with a denomination of $1, you have created $1000.

If you want to destroy that $1000, you have to melt the coins.

Next, think of bank notes, if you print 1000 bank notes with a denomination of $1, you have created $1000.

If you want to destroy the $1000, you shred the 1000 notes.

The thing about the bank notes is that they do not become currency until someone is willing to borrow them (that is to say, collateral them).

And think about this, coins are listed as assets on the Fed balance sheet, while Fed notes are listed as liabilities (Borrower government bonds and promissory notes are listed as assets as collateral for those notes).

http://www.federalreserve.gov/releases/h41/current/

11. Collateral Held against Federal Reserve Notes: Federal Reserve Agents' Accounts
Millions of dollars
Wednesday
Federal Reserve notes and collateral Oct 27, 2010

Federal Reserve notes outstanding 1,130,012
Less: Notes held by F.R. Banks not subject to collateralization 207,687
Federal Reserve notes to be collateralized 922,325
Collateral held against Federal Reserve notes 922,325
Gold certificate account 11,037
Special drawing rights certificate account 5,200
U.S. Treasury, agency debt, and mortgage-backed securities pledged (1,2) 906,088
Other assets pledged 0

Next, you have to think about demand deposits, that is amount listed in checking accounts that have been created through fractional reserve banking, and are backed by the promissory notes of the borrowers (Usually collateralized by real estate).

Now, go back to the barren economy example and think of it this way:

S.B. goes into bank and signs promissory note for $1000, banker creates entries of $1000 on his books.

$1000 in assets for S.B.'s promissory note, and $1000 in liabilities for the demand deposit.

We have not mentioned the interest rate that the banker is charging S.B. but if you pay particular attention, if the banker is charging %10 per annum, you know that at the end of the year S.B. will owe the banker $1100, but only $1000 was created on the initial transaction, so the banker has to find a way to have S.B. "earn" the needed units to service his debt and do not default.

The problem that the banker has is that if S.B. stops working, that $1000 created in demand deposits are pretty much destroyed, since S.B. is no longer earning units of currency to service his debt, that is to say S.B. is no longer putting goods and services into the economy.

When that happens, the bank is insolvent, so they then go to the Fed and say - Here take this bad debt for $1000 and give me currency units people will accept. What you have in that instant is $1000 that no one is servicing with goods and services into the economy which is what causes inflation.

I know I have over simplified it, but if you get it, then you know how to profit in this economy.

Billboard

"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money (at the request of the consumer) we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." --Robert H. Hemphill, Atlanta Federal Reserve Bank,1938...

[ThePythonicCow]

Re: Mega has a question

When that happens, the bank is insolvent, so they then go to the Fed and say - Here take this bad debt for $1000 and give me currency units people will accept. What you have in that instant is $1000 that no one is servicing with goods and services into the economy which is what causes inflation.

But ... as Steve said ... where's the velocity?

As you noted:

The thing about the bank notes is that they do not become currency until someone is willing to borrow them (that is to say, collateral them).

The bank has this $1000 from the Fed on it balance sheet. But if it doesn't lend, that money just sits there, allowing the bank to remain solvent.

My take on this QE is quite different.

For some reason, it seems that the Fed/Treasury/FDIC/GSE's are determined to build up a humongous pile of what is, or will become, U.S. Treasury debt. The various QE's are just the public view of part of this debt accumulation effort. The QE's are a pretense that this is being done to "ease" the economy, get things moving again for the ordinary person.

But as most of us know by now, the Fed et. al. don't work for the ordinary person.

They are owned by and work for a much smaller pool of much wealthier, more powerful, individuals, families or organizations.

So I have to assume that it is, or will be, in the interests of that smaller pool to have a humongous pool of Treasury debt.

I expect, sooner or later, that we ordinary Americans will find that we owe a humongous amount of money to that much smaller pool, for high yields (higher than real inflation) and at long terms (10, 20 or 30 years.) Those in that pool will have a quite fine income stream. We Americans will get to learn first hand about the austerity we've shoved down other people's throats this last half century, as the profits of our labor and the wealth of our land are drained to pay this debt. We Americans will neither receive nor deserve much sympathy from the rest of the world.

Let's say you are a rich and famous person, with your own private physician. I'm thinking of Michael Jackson here, he of "Moonwalk" fame. When your physician administers a modest dose of speed to you, it might be to help you lose weight or to help you get energized for some event. But when he administers several times the lethal dose, you have to start researching the terms of your will and insurance policies to best understand your physicians motives. If by some means your physician or those who might be controlling him stand to gain great fortunes from your demise, then you have means, motive and opportunity. All you need now is a minor miracle to keep you alive, or an honest court to prove murder if you die.

The Fed is America's monetary physician. America is the richest nation on earth. It's even done the "Moonwalk", for real. The Fed is administering many times the lethal dose of debt to America. Unfortunately for Americans (such as myself) we seem to have a shortage of minor miracles or honest courts.

(Some details of drugs, crimes, benefactors and moonwalks above have been altered from reality to make a better story.)

[ThePythonicCow]

Re: Mega has a question

My above reply regarding Michael Jackson and the Federal Reserve is not meant to imply there won't be inflation. There will be. It's starting to show now and all parties from the sensible mainstream to the sensible alternative thinkers such as EJ to the goldbugs and looney conspiracy nuts such as myself agree that there will be inflation. If, as the ordinary man thinks, inflation means "higher prices for the things I need", then inflation will itself cause the increasing velocity of money, as people seek to spend their money faster than it loses value. If you're an economist trained in monetary theory, you will probably explain this the other way around, saying that inflation is an increase in the money supply, which tends to cause rising prices. But either way we're getting there.

[BillBoard]

Re: Mega has a question

But ... as Steve said ... where's the velocity?

As you noted:The bank has this $1000 from the Fed on it balance sheet. But if it doesn't lend, that money just sits there, allowing the bank to remain solvent.

My take on this QE is quite different.

For some reason, it seems that the Fed/Treasury/FDIC/GSE's are determined to build up a humongous pile of what is, or will become, U.S. Treasury debt. The various QE's are just the public view of part of this debt accumulation effort. The QE's are a pretense that this is being done to "ease" the economy, get things moving again for the ordinary person.

Yes, the velocity is implied by the assumption that the banks will lend once they have replaced their non performing loans with assets from the Fed.

This of course does not take into account that those that have lost their jobs will not be credit worthy and the business that have gone bankrupt no longer are putting goods and services into the economy (supply destruction).

By building up the balance sheet with Treasuries, all they are doing is assuring themselves of having cash flow liquidity from all the taxpayers that then they can go ahead and buy out all the assets of the bankrupt on the cheap.

[BillBoard]

Re: Mega has a question

My above reply regarding Michael Jackson and the Federal Reserve is not meant to imply there won't be inflation. There will be. It's starting to show now and all parties from the sensible mainstream to the sensible alternative thinkers such as EJ to the goldbugs and looney conspiracy nuts such as myself agree that there will be inflation. If, as the ordinary man thinks, inflation means "higher prices for the things I need", then inflation will itself cause the increasing velocity of money, as people seek to spend their money faster than it loses value. If you're an economist trained in monetary theory, you will probably explain this the other way around, saying that inflation is an increase in the money supply, which tends to cause rising prices. But either way we're getting there.

There will be inflation from the demand destruction from all the business that have failed, and from the lack of viable credit demand. It is not until RE cash flows that things will be reset.

[BillBoard]

Re: Mega has a question

This is a nice presentation which may help you understand:

[mooncliff]

Re: Mega has a question

In a healthy economy, banks typically lend out more money than they have on deposit. But in Osaka, Japan’s third largest city and commercial hub, nearly two decades of hoarding of cash created the unusual situation in 2002 of deposits at all the city’s banks surpassing their outstanding volume of loans. Since 1997, the total amount of loans by the city’s banks has fallen by a third, to $530 billion, while deposits have risen by 20 percent, to $767 billion.

“Deflation has made everyone very conservative and eager to hold cash,” said Hiroshi Tanaka, a senior director at Osaka Shinkin Bank. “We have too much cash and nowhere to invest it all.”

This has created distortions in Japan’s economy. One is a sharp drop in the number of times cash changes hands in normal business and spending transactions. This so-called velocity of money has dropped to about a third the level of the United States, according to figures from the Mizuho Research Institute in Tokyo.

Another distortion is Japan’s so-called dresser savings — the piles of cash that individuals keep at home for fear that their banks may also go bankrupt. These stashes are estimated to total about $370 billion, according to Akira Otani, a researcher at the Bank of Japan.

Economists see early signs that the United States is heading down the same path. Recent data shows a surge in savings rates to 6.4 percent in June from less than 1 percent in 2005, reflecting consumers’ reluctance to spend, and continued disinflation.

http://www.nytimes.com/2010/10/30/wo...e&ref=homepage

[ThePythonicCow]

Re: Mega has a question

Ok If its $2 trillion thats a lot, but i can't see where the velocity comes from.......?

I suspect, Mega, that most of the replies above are working under the assumption that you were asking how the money system should work, according to the official story.

I suspect however that you know jolly well how it is supposed to work, and that the point of your question was to point out, with your usual droll Brit brevity, that it ain't working. That money ain't moving.

One point of my replies above was to allow as how it will seem to work, in that we will indeed get inflation. However it will come from demand destruction (fewer jobs, less debt, less to spend), supply destruction (pools of investment capital and money to lend drying up), and currency destruction (the U.S. Dollar and the reputation of the Empire behind it are going the way of the Pound and the once mighty British Empire a hundred years ago.) The demand destruction would seem on the surface to push prices down not up, but since so much of our manufacturing and distribution capacity is tuned for high volumes, the lower volumes resulting from lower demand push us down into a region of reduced efficiency, forcing suppliers to raise prices or go out of business. QE will seem to "work" in that we get we will get our higher prices (what the layman defines "inflation" to be) and hence get nominal increases in economic activity, however, as you well know, it won't really work to the benefit of us peons.

The other point of my replies above was to argue that the real reason the Fed is doing this has nothing to do with improving Mega's or Cow's positive cash flow (as in "happiness is a positive cash flow.") They are ultimately looking to improve our negative cash flow -- as in steal most of what's left and most of what we might earn in the future.

The super-wealthy are treating us like industrialized farming treats the land, where all life except that directly related to the designated crop is considered a weed. They are not treating us like the private reserves where they go hunting, where an abundance and diversity of life are to be enjoyed and encouraged.

[BillBoard]

Re: Mega has a question

Oops, didn't know it was a rhetorical question.

[BillBoard]

Re: Mega has a question

The super-wealthy are treating us like industrialized farming treats the land, where all life except that directly related to the designated crop is considered a weed. They are not treating us like the private reserves where they go hunting, where an abundance and diversity of life are to be enjoyed and encouraged.

Very poignant. Now you know that if you have lost the game, you are very much surplus to the winners and a useless eater that needs to get off the planet ASAP. They sure welcome your decision to be fertilizer, and if you can take some other useless eaters with you much the better.

It sure is not pretty to lose the debt(usury) game.

[BillBoard]

Re: Mega has a question

Mega, I was waiting for you to chime in...

TPCow, can you tell me what is the principal payback destruction rate on 30 year bonds yielding 0%?

[ThePythonicCow]

Re: Mega has a question

Mega, I was waiting for you to chime in...

Unfortunately, Masters of British Brevity engage in less idle chit-chat than typical bloggers.

TPCow, can you tell me what is the principal payback destruction rate on 30 year bonds yielding 0%?

Same as cash? I may regret asking this ... but why do you ask?

[Mega]

Re: Mega has a question

Sorry, but i am having "troubles" (Mental issunes)................I don't think it will now matter, the FED is only going $500 Billion......So what?

Mike

[BillBoard]

Re: Mega has a question

Same as cash? I may regret asking this ... but why do you ask?

Because that is the common assumption. But think about it, the people rent the money from the Fed.

Even if you rent the money at 0%, you have to pay it back, right? So think about the decay rate of money, Sapiens had some threads dealing with the issue.

For example, if the principal is to be paid back in one year, the decay rate is 100% per annum.

If the principal is to be paid back in two years, the decay rate is 50%.

If the principal is to be paid back in 3 years, the decay rate is 33.333%.

If the principal is to be paid back in 4 years, the decay rate is 25%.

If the principal is to be paid back in 5 years, the decay rate is 20%.

If the principal is to be paid back in 6 years, the decay rate is 16.666%.

If the principal is to be paid back in 7 years, the decay rate is 14.2857...%.

If the principal is to be paid back in 8 years, the decay rate is 12.5%.

If the principal is to be paid back in 9 years, the decay rate is 11.111...%.

If the principal is to be paid back in 10 years, the decay rate is 10%.

If the principal is to be paid back in 20 years, the decay rate is 5%.

If the principal is to be paid back in 30 years, the decay rate is 3.333...%.

So if the initial money supply is borrowed at 0% and to be paid back at 0% for 30 years, on the second year you will only have 96.6667% of the initial amount for a money supply contraction of 3.333...%!

Now do you understand why the Fed has to intervene without spooking the bond market?