Few questions for the experts... Aren't we on an oil standard? As long as oil from certain countries is bought and sold only in U.S dollars? Isn't that what gives our currency any sort of illusion of stability? Aren't we living in an import economy? Don't we buy way more than we sell? Aren't the Fed and banks in general fictitiously inflating the economy when they only hold a small percentage of the currency they loan out in reserve? If I have ten dollars you loaned me, is it fair of me to loan it out to someone else and not tell you? What if I give ten people a bank card for ten dollars and only have you and a few other peoples money to back it up with? Isn't that how the Fed works? They print out 1million and have nothing to back it up? Isn't currency supposed to represent some actual good or worth? Wasn't the depression caused by banks lending WAYYYY more than they could actually pay back in gold? Didn't the banks get a pass from the government on their debts back then and the Fed and FIDC were created to make it seem like the economy was actually stable again? If everyone today withdrew their money from the bank would anyone be able to pay it out? Would we have to wait a few weeks for them to print more cash? Would that destroy the economy? I really am not sure about the answers to these questions. I am only going on what I have been taught, so if anyone can correct my assumptions please do.
Are you kidding me? The Federal Reserve caused the Depression, Bernanke and Greenspan admitted it. The problem wasn't liquidity, it was easy credit (artificially low interest rates, brought on by the creation of new money). The roaring 20s were all about people using credit to invest and live beyond their means. And when the crunch came, it collapsed the economy. I'm getting really tired of educating you on things that are out there for you to find yourself. I mean, c'mon. Meet me halfway here. Supply and demand is a simple concept. But it generally holds true. You never seem to address fundamentals. If the fundamentals are not there, the system is always susceptible to swings based on speculation. We're not talking about bonds. We're talking about currency. Banks have to compete for reserves. That is why interest rates go up, and the money supply contracts. When they are lowered, the money supply inflates. You can't say an unsecured investment is worth anything. Until you cash out. Then what are Fannie Mae and Freddie Mac? Right, and what were interest rates in the 80s? Much higher than today. The economy was undergoing an adjustment. This is natural. Today we have soaring commodities and low interest rates (discouraging saving). This is an anomaly. It's unnatural in a free market.
Not an expert, but I'll try. Very astute. A swap in the preferred oil currency would cause great upheaval to the US economy. Our deals with the Saudis require them to keep the dollar as the currency of choice, as long as they bank in the US (keep the money out of circulation). This is also correct. There is a large and growing trade deficit. Even with a devaluing dollar on the international markets. Bingo, the wonders of "fractional reserve banking". They keep a fractional reserve, somewhere around 10%. But it is not 10% of the value in gold. It is 10% in government securities. This is also correct. Everytime we have altered the ratio of gold to notes of credit, it has usually come due to (1) massive growth in government entitlement programs and (2) war. After Vietnam, we had cheated on the Bretton Woods agreement, printing more bills than there was gold (@ a $35/ounce peg). As foreign countries started exchanging their US currency for gold, Nixon had to dissolve Bretton Woods, and that was the end of any form of Gold Standard in the USA. Of course, that did not solve the domestic problems, so we saw super high interest rates in the 70s and 80s. A bank run would destroy the financial system. Fractional reserve banking is a system predicated on maintaining a reserve based upon the likely number of withdrawals vs. deposits. An imbalance would stress the system heavily, and the banks would have to call loans quickly, to increase liquidity. This would cause a massive credit crunch, and liquidation of investments, causing a stock market crash. Seems to me, you are already an expert.
Easy credit created the bubble, Lack of liquidity created the depression. The reason there was a lack of liquidity was directly tied rules governing the gold standard. 50% of the banks don’t fail or merge because of ample liquidity. http://en.wikipedia.org/wiki/Great_Depression U.S. Federal Reserve and money supply Monetarists, including Milton Friedman and Benjamin Bernanke, argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policy making by the American Federal Reserve System and continuous crisis in the banking system.[4] By not acting, the Federal Reserve allowed the money supply to shrink by one-third from 1930 to 1931. Friedman argued[5] the downward turn in the economy starting with the stock market crash would have been just another recession. The problem was that some large, public bank failures, particularly the Bank of the United States, produced panic and widespread runs on local banks, and that the Federal Reserve sat idly by while banks fell. He claimed if the Fed had provided emergency lending to these key banks, or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did and the money supply would not have fallen to the extent and at the speed that it did.[6] With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch, which was owned and controlled by Wall Street bankers[citation needed]. The Federal Reserve, by design, is not controlled by the President or the U.S. Treasury; it is primarily controlled by member banks and the chairman of the Federal Reserve.[7] One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit that the Federal Reserve could issue was limited due to laws which required partial gold backing of that credit. By the late 1920's the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes. Since a "promise of gold" is not as good as "gold in the hand", during the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. Several years into the Great Depression the private ownership of gold was declared illegal and reduced the pressure on Federal Reserve gold. Yes it’s very easy to just say supply and demand, but what drives demand? Inflation, interest rates, and a host of other factors. Freddie Mac and Fannie Mae are government sponsored enterprises, they use to the governments Triple A credit rating to get a lower interest rate on the money that they borrow. Not corporate bailouts. Because inflation was much higher in the 80s higher inflation leads to higher interest rates to combat inflation.
Soniq, don't take this personally, but I'm not going to respond to your posts anymore. It's become a case of repeating myself, and I don't feel like the conversations have advanced at all in the last 2 weeks. You seem to have a keen interest, I'd suggest you abandon any preconceptions you have, and pick up a copy of "Crash Proof" by Peter Schiff. Or better yet, join up at Mises.org and argue real economists, who are experts in their field, about economics, statistics and history. They have a forum for just that purpose. Maybe hearing it from a different source will communicate it better than I can.