THE Federal Reserve Thread pt 2 (merged)

[marek]

Source: bloomberg.com

When the Fed raised the overnight bank-lending rate in the past, long-term interest rates rose as well. This time around, investors took comfort in the Fed's commitment to what it calls a measured pace of rate increases as a way to head off faster inflation. Instead of rising, yields on 10-year Treasury securities and rates on 30-year mortgages fell.

Correct me if I'm wrong, but I believe this suggests that the yield curve is inverting which means an imminent recession.

[spot5050]

Is our fractional reserve banking system guaranteed to breakdown after a few years of decline? If so, does anyone have any non-peakoil related links or books they could recommend on this aspect of the banking system.

Thanks in advance.

[jaws]

What do you mean by 'break down'? The last time the banking system really broke down was in the Great Depression, but that was because the banks had heavily invested their deposits into the stock market and got wiped out. Today they won't even invest in mortgages, it's too risky, they just resell them to Mae and Mac. I don't think there's any danger of the system breaking down.

[spot5050]

Our financial system requires GDP to increase each year in order to function; if GDP falls for too many years the banking system will not cope. Modern economic strategy will only cope with shrinking GDP for so long then the banks will start to get into trouble, apparently.

I'm curious to know if this is a generally accepted principle of fractional reserve banking or just some crackpot theory.

[max_power29]

What do you mean by 'break down'? The last time the banking system really broke down was in the Great Depression, but that was because the banks had heavily invested their deposits into the stock market and got wiped out. Today they won't even invest in mortgages, it's too risky, they just resell them to Mae and Mac. I don't think there's any danger of the system breaking down.

That's not true. The banks invest their debt assets and deposits in practically everything there is to invest in. its a giant web of multi-layered investing of everybody investing and re-investing everything ("derivitives")

[Permanently_Baffled]

Our financial system requires GDP to increase each year in order to function; if GDP falls for too many years the banking system will not cope. Modern economic strategy will only cope with shrinking GDP for so long then the banks will start to get into trouble, apparently.

I'm curious to know if this is a generally accepted principle of fractional reserve banking or just some crackpot theory.

I think you are right (see monte's thread reference growth and our monetary system are they compatible), but then how did our banking system cope during the 70's and 80's recessions? Or where we not so much in debt then ( I know for example that the UK was on the brink of bankruptcy and was getting hand outs from the IMF)

Just curious

PB

[max_power29]

Our financial system requires GDP to increase each year in order to function; if GDP falls for too many years the banking system will not cope. Modern economic strategy will only cope with shrinking GDP for so long then the banks will start to get into trouble, apparently.

I'm curious to know if this is a generally accepted principle of fractional reserve banking or just some crackpot theory.

I think you are right (see monte's thread reference growth and our monetary system are they compatible), but then how did our banking system cope during the 70's and 80's recessions? Or where we not so much in debt then ( I know for example that the UK was on the brink of bankruptcy and was getting hand outs from the IMF)

Just curious

PB

The 70s and 80's were recessions, not depressions. the GDP was still growing (not shrinking) but the rate of growth was shrinking. (Think calculus). Also tthose recessions were based on politics, not peaking resources

[I_Like_Plants]

If those were only when the rate of growth was shrinking, it ought to be "really fun" when growth itself goes down.

[spot5050]

Our financial system requires GDP to increase each year in order to function; if GDP falls for too many years the banking system will not cope. Modern economic strategy will only cope with shrinking GDP for so long then the banks will start to get into trouble, apparently.

I'm curious to know if this is a generally accepted principle of fractional reserve banking or just some crackpot theory.

I think you are right (see monte's thread reference growth and our monetary system are they compatible), but then how did our banking system cope during the 70's and 80's recessions? Or where we not so much in debt then ( I know for example that the UK was on the brink of bankruptcy and was getting hand outs from the IMF)

Just curious

PB

Thanks PB, but I know MQ accepts this theory. However, is it an accepted economic principle?

[MonteQuest]

Our financial system requires GDP to increase each year in order to function; if GDP falls for too many years the banking system will not cope. Modern economic strategy will only cope with shrinking GDP for so long then the banks will start to get into trouble, apparently.

I'm curious to know if this is a generally accepted principle of fractional reserve banking or just some crackpot theory.

I think you are right (see monte's thread reference growth and our monetary system are they compatible), but then how did our banking system cope during the 70's and 80's recessions? Or where we not so much in debt then ( I know for example that the UK was on the brink of bankruptcy and was getting hand outs from the IMF)

Just curious

PB

Thanks PB, but I know MQ accepts this theory. However, is it an accepted economic principle?

The economic principle at play is one of inflation/defaltion. Too much money supply creates inflation. Too little, deflation. Cutting the money supply is easy. Increasing the money supply is another thing altogether. It is this balance that keeps the house of cards standing.

The accepted economic principle is that you will always be able to increase the money/energy supply. Without energy you can only increase the money supply by hyperinflation.

[qwanta]

I thought this article was very interesting in the way it was put together:

I Want The Earth Plus 5%


I thought these books were worth taking a look at too:

Edward Griffin "The Creature from Jekyll Island"

Murray Rothbard "What has Government Done to Our Money?"

Murray Rothbard "Mystery of Banking" (scroll to the middle of the page)

[Doly]

I really recommend the article above. After struggling for ages to understand what the hell was debt-based money, I finally got it.

I can also see why, if everybody asked for the money they supposedly have in the bank at the same time, there just wouldn't be enough. But what I still can't see is why the system doesn't fall over. One would think that it's been running for long enough to fall over somewhere. Maybe it has fallen over in some country, but I don't know about it. Or maybe I'm missing something here.

Can anybody explain?

[Kez]

I really recommend the article above. After struggling for ages to understand what the hell was debt-based money, I finally got it.

I can also see why, if everybody asked for the money they supposedly have in the bank at the same time, there just wouldn't be enough. But what I still can't see is why the system doesn't fall over. One would think that it's been running for long enough to fall over somewhere. Maybe it has fallen over in some country, but I don't know about it. Or maybe I'm missing something here.

Can anybody explain?

I'm no expert, but I believe it hasn't fallen over yet because the interest is paid out in the future. So the prosperity we are seeing is 'borrowed' from the future. But since new money is continually entering the system today, prices keep going up, and we have more money to spend (assuming we get a pay raise from time to time).

Every loan I take is created by borrowing from my future earnings. At some point though, I don't think it can sustain itself, and will collapse. How or when is anyone's guess. If enough people can't make their payments, then Citibank, etc. won't have enough to send out to the companies who are relying on that cash at the end of the month, who then won't have enough to stay in business or pay employees.

The payments though for loans and whatnot are kept pretty low so that they are attainable. It's an illusion though, since the loan is spread out so far. For example, the Citibank credit cards minimum amount due is so low that it would take many years to pay it off if that is all that people sent in, and they would end up paying 3 times as much or whatever for the actual amount they credited. Sadly, lots of people I know pay that minimum amount and not much else.

And the banks/gov't just changed the rules significantly again, by altering the bankruptcy laws. No longer is it so easy to go without paying your debts, which to me is a good thing, but they still make it way to easy for people to get in over their heads financially.

[NEOPO]

MUSELETTER - MONEY

IMO - a very good piece on money.

[CrudeAwakening]

Since it seems to be impossible to settle all outstanding debts without dipping into the earnings from future economic growth, what would happen if loans were recalled on a large-scale basis (apart from contraction of the money supply)? Don't we have to continue to make more loans to keep the whole stack of cards upright?

Confused newbie

[I_Like_Plants]

All museletters = good

[oiless]

There were bank failures in the '70s and '80s, they had to rejigger the deposit insurance system a couple of times, as it kept going bankrupt.

http://wfhummel.cnchost.com/depositinsurance.html

There have apparently been no bank failure in the States yet this year, and the numbers have been decreasing over the years, I have no idea if this is due to good economic times, better management and controls, or the amalgamation of many smaller banks into existing mega-banks.

http://www.fdic.gov/bank/historical/bank/

In Canada we had a number (2 or 3 or 4, I don't remember for sure) of bank failures in 1985. This shook things up a bit, since these were the first Canadian bank failures since 1923.

[spot5050]

The economic principle at play is one of inflation/defaltion. Too much money supply creates inflation. Too little, deflation. Cutting the money supply is easy. Increasing the money supply is another thing altogether. It is this balance that keeps the house of cards standing.

The accepted economic principle is that you will always be able to increase the money/energy supply. Without energy you can only increase the money supply by hyperinflation.

Hi MQ, accepted where? Got any books or links? I can't find anything that discusses economics and declining energy.

The principle seems to be common sense to me, but I have failed to find any economics books that even mention it.

[spot5050]

I thought this article was very interesting in the way it was put together:

I Want The Earth Plus 5%


I thought these books were worth taking a look at too:

Edward Griffin "The Creature from Jekyll Island"

Murray Rothbard "What has Government Done to Our Money?"

Murray Rothbard "Mystery of Banking" (scroll to the middle of the page)

There were several tens of thousands of words in those articles qwanta. I'm not going to read the whole lot. Can you summarise?

[spot5050]

MUSELETTER - MONEY

IMO - a very good piece on money.

What do you think that piece means NEOPO? Why is it good?

And how does it relate to my OP?