United States Heading towards a Depression?

Yes it can. Remember fractional-reserve lending?

 

You mean they invested millions and lost those, or that they claimed finances they really didn't have?

I'm trying to understand where you are coming from.

Unless I am misunderstanding him, that's not what Ferret is talking about. He's not talking about the FED decreasing the money supply, he's talking about money being lost in commercial transactions.

 

Well this article is a big kick in the gonads...

U.S. faces severe recession: NBER's Feldstein
http://biz.yahoo.com/rb/080314/usa_economy_feldstein.html?.v=1

Excerpt

 

Yes, the banks, financial institutions, and mutual funds took their balance sheets from the top of the bubble appraisals and used their total estimated assets to invest in more stocks. Of course, they can leverage this 2-50 times thanks to fractional reserve insanity, so every $200 billion dollar bank bust could represent a total of $1 - 2 trillion in bubble pricing throughout various sectors in the stock market. From the funds that have been allowed to collapse, there is probably about $10 trillion in total "digital money" less than there was this time last year.

No the fed isn't directly decreasing the money supply, its a result of the bubble popping and leveraged investments unwinding. The Fed is trying desperately to replace the "bad money" with "new good money" but they are approaching a rate almost equal to the entire U.S. GDP over the last few weeks.

The fed right now, is trying to fill a leaky bucket. The holes are there from the bubbles created with its post 9-11 crazy low interest rates...

The dollar is not going down necessarily because there are more of them than before, but because our spending habits are completely out of control compared to our income and quite simply, our credit rating stinks now because international investors and governments do not know how we're ever going to pay back all our liabilities.

 

The problem is all the employees and execs who RAKED in BIG money off of these bad investments aren't being held responsible for their recklessness and complete lack of due care. So we will all pay for it and without any accountability it's outrageous.

 

Not really, it just doesn't make the news as much as their big paychecks. A few of the big shots at Bear Stearns lost $100 million or $200 million today...

 

Some time after the election the Fed will give up and let the bubble unwind

Answering questions from the audience, Feldstein said the downturn could be the worst in the United States since World War Two.

"The housing situation is getting worse by the day,"

 

I'm not sure the above is correct. I'm not sure that banks are allowed to exercise fractional reserve banking in that manner, without the participation of the FED, and open market operations.

The FED has the ability to create money out of thin air, but not the mutual funds.

Not sure I agree with this either. The FED is not trying to replace bad with good AFAIK. They are trying to inject liquidity to inflate the bubble again. It's all about velocity of money. The theory being that if the system is starved for liquidity, the velocity will slow, and losses can become catastrophic.

So Bernanke is trying to speed the velocity back up, even increase it, in the hopes that the losses will be softened and absorbed by the heightened economic activity.

I'm not clear on the bucket analogy. There are not holes per se. They are malinvestment. People bought houses for too much because the money and credit facilities were easy. People pulled equity out of their homes, because they thought their house was worth more than it really was, and again, the credit was fast and easy. People heavily leveraged themselves in the market, just as they did in the roaring 20s, again, because the credit was cheap and easy. And a lot of dummies used credit for consumption, creating debt that can't easily be liquidated.

Until the economy cleans up (not patches *holes*) it won't be healthy again. This is going to require a credit and monetary contraction. People will have to go broke, or liquidate and pay their debts.

Which is why lots of personal financial experts are advising everyone to get debt free ASAP.

This is incorrect. The dollar is going down because no one wants to take it. As we create more dollars, they become less desirable. It also takes more of them to buy something.

A medium of exchange's value is dictated by it's scarcity. Decreasing scarcity drives down it's value. Which is why metals are traditional hedges, because unlike dollars, you cannot produce 100 oz as easily as 1 oz, but you can print a $100 as easily as you can a $1.

For sure, confidence plays some role, but if rates were higher (less currency in the system), foreigners would be more willing to invest in the dollar. Right now we have instability, and monetary inflation that is out of control.

 

The only reason the bad investments happened, is that the Federal Reserve got everyone drunk on cheap credit.

Sure, many people profited by knowingly doing wrong, but the FED enabled that scenario. As an agency responsible for the nation's monetary supply, the FED should not be creating moral hazard like this.

 

This is thread is probably equivalent to a Bachelors in Economics.. keep it going

 

Well I know Carlysle had its investments leveraged 32 times into triple-A rated bonds that ended up failing. Any investor with $2,000 in capital can open a margin account with $20,000 in buying power...

But what is liquidity other than cash that isn't tied to mortgage and financial instruments? The banks have no liquidity because their assets have tanked.

I completely agree with you and this is why the money supply has shown weeks and months of contraction, naturally, in the times when the fed hasn't taken aggressive actions. Contraction is the natural result of the bust cycle, but its so devastating in a fractional system that this convinces the fed to keep pumping money into the system as quickly as market values can re-value assets. You and I agree that the business cycle won't go away, but this doesn't stop Bernanke from trying.

Scarcity of supply IS a factor - but its not the only factor. Since they stopped publishing M3 the market has been contracting it and the Fed has been trying to "reflate" the worst of those losses as they happen. The freeze in the financial markets coupled with the Fed's discontinuance of the M3 indicator suggests to me that the contraction has already begun - but it hasn't stopped the dollar from reaching all-time post Bretton-Woods lows.

What the international investors are seeming to say is that it doesn't matter how many dollars are out there because its going to be a loss. If anyone thought our economy could survive higher interest rates, they would be taking advantage of the dollar's lows and speculating a turn-around.

 

Right, but they are borrowing the $18,000 from their broker. It's not fractional reserve banking.

Not necessarily. The banks have limited liquidity because their assets have tanked. But the real liquidity problem is that the banks are concerned with losses due to asset devaluations, so they are unwilling to leverage more paper which could go bad. That is why the FED is (sic) lowering rates. They are pumping excess liquidity into the system, to convince the banks to start lending again.

Well, we don't fully agree (I don't think). The business cycle is brought on by the FED.

The FED is only pumping liquidity into the system so that the bubble doesnt burst and no one feels the pain. Some of this is corporate welfare, the rest is politically motivated.

In order to contract, money must be destroyed. Only the FED destroys money. The FED has not been destroying money.

The FED discontinued M3 in 2006, before the crisis hit this point. That is because they don't want anyone to see how much new money they are pumping into the system. It has nothing to do with contraction. You don't need M3 alone to evaluate this. You can use M1, M2 and MzM.

The foreigners are not saying that our dollars are a loss. They are saying our dollars are infinite, and hence, have very little value as a store of value, or medium of exchange.

Basically, they are now (and actually have been for quite some time) counterfeit. And there are other healthier economies, where the bills of credit are not counterfeited at the same rate.

 

That's what I'm looking at - M1 and M2. They show to be mostly flat since Dec. despite us knowing that the fed has been pumping new cash into the system. There has to be 1) something contracting the money supply other than the fed 2) something beyond supply affecting the value of the dollar.

How else is M1 and M2 staying flat when the Fed is putting hundreds of billions in each week? How else is the dollar dropping when M1 and M2 are not going up as quickly?

 

15.7% would explain what I've seen in currency and commodities, but thats totally disconnected from what I'm seeing in M1 and M2. I hate the fed. I have more studying to do!!




The rate of growth declines over the last year for M0 and M1 - the most liquid definitions of the currency. M2 and M3 and MZM are based on fractional lending-created dollars at the commercial bank level.

So M1 is down, M0 is down, but M2 and MZM are through the roof? This means more loans built into less money, expansion and contraction acting on the same economy...

Anyway...this guy says when I'm thinking better than I can
A Deflationary Collapse Followed by Hyperinflation

 

That's life brother.

Check this stuff out!

My man Jim Rogers!

Jim Rogers: 'Abolish the Fed'
http://www.cnbc.com/id/23588079

and my boy Peter Schiff!

Dollar plunge sets off global alarm bells
http://www.telegraph.co.uk/money/ma...8/03/14/cndollar114.xml&CMP=ILC-mostviewedbox

 

Well, he's an Austrian school economist, I wouldn't be surprised if he has come to the same conclusion that I posted by Gary North in this thread some time back.