[MonteQuest]

Out of all the reasons proffered as the cause of the Great Depression, only one explanation--that has stood the test of time-- focuses on the collapse of the U.S. banking system and the resulting contraction of the nation’s money supply.

As the money supply shrank, spending on goods and services declined, which in turn caused firms to cut prices and output and to lay off workers. Defaults and bankruptcies soared, creating a vicious spiral in which more banks failed, the money supply contracted further, and output, prices and employment continued to decline.
Print too much money, and its value declines—that is, prices rise (inflation). Shrink the money supply, on the other hand, and the value of money rises—that is, prices fall (deflation). As I have explained, electronic bank deposits—not coins or currency—comprise the lion’s share of the money supply. The money supply fell during the Great Depression primarily because of banking panics. Because banks hold only a fraction of the value of their customers’ deposits in the form of reserves, a sudden, unexpected attempt to convert deposits into cash can leave banks short of reserves. Also, depositor’s funds may be invested in bank assets that are not readily liquid. Using bank reserves to pay out depositor’s electronic money, does not increase the “money supply,” it increases the cash supply.

During the Great Depression, many banks could not or would not borrow from the Federal Reserve because they either lacked acceptable collateral or did not belong to the Federal Reserve System. As depositors pulled funds out of banks, banks lost reserves and had to contract their loans and deposits, which reduced the nation’s money supply. The monetary contraction, as well as the financial chaos associated with the failure of large numbers of banks, caused the economy to collapse.

And this took place in an environment of cheap, readily accessible fossil fuels where the prospect of growth was infinite, relatively speaking. Under a prospect of limited or no growth, banks will fail, and loans will contract, shrinking the money supply with no mechanism to re-inflate it.

[MonteQuest]

The government essentially owns both the asset and the liability - that is fiat money.

No, the Federal Reserve is not a part of the US government. The FED holds the securities and they back the FRN's with a promise of a ROI via economic growth.

Fiat money is a currency established as money by government regulation or law with no backing like gold or silver, etc. Fiat money is inconvertible and cannot be redeemed for anything of value.

[MonteQuest]

Regardless of what a federal gov does there will be currency.

Currency is not relevant to the discussion. In Weimar Germany there was lots of currency. Worthless.

[MonteQuest]

10% of current money in an environment where all banks have gone broke seems like quite a bit.

Banks? You mean everyone, don't you? Wipe out the debt and you wipe out all wealth. Debt=money.

The money will be worthless. It has often been a paradox that the worse an economy turns down, the higher the currency rises. But it is a bell curve. Where have we heard that term before? In a flight to quality, people want cash and dump assets. The US dollar rose to record highs during the Great Depression. If the currency rises too high, and the economy has no hope of survival, then it reverses and collapses into dust.

Still looking for an answer to my question: If all money is debt, and debt defaults and repayments destroy the money created, what prevents the money supply from going to zero when all debt defaults and/or all debts are paid?

[onlooker]

http://www.peakprosperity.com/blog/7921 ... oney-dying
Maybe this link will be helpful for those who like me wish to discover more in depth how money and debt interrelate with the economy.

[MonteQuest]

http://www.peakprosperity.com/blog/79219/our-money-dying
Maybe this link will be helpful for those who like me wish to discover more in depth how money and debt interrelate with the economy.

But that link only deals with inflation issues. We could see hyperinflation before deflation, though.

[Pops]

The government essentially owns both the asset and the liability - that is fiat money.

No, the Federal Reserve is not a part of the US government. The FED holds the securities and they back the FRN's with a promise of a ROI via economic growth.

The Federal Reserve System fulfills its public mission as an independent entity within government. It is not "owned" by anyone and is not a private, profit-making institution.

As the nation's central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve's activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as "independent within the government" rather than "independent of government."
http://www.federalreserve.gov/faqs/about_14986.htm

The Federal Reserve makes money—lots of it. The Fed had over $4.5 trillion in assets, as of March 12, 2015. The majority of revenue comes from open market operations—specifically the interest on the Fed's portfolio of Treasury securities as well as the money that comes from the buying/selling of the securities and their derivatives.
...However, the Fed doesn't really keep the money. The government receives all of the system's annual profits—after certain expenses. In 2014, the Fed sent $98.7 billion of its $101.5 billion total net income in 2014 to the U.S. Treasury.
http://www.cnbc.com/id/43752521

Although Federal Reserve purchases of Treasury securities do not involve printing money, the increase in the Federal Reserve's holdings of Treasury securities is matched by a corresponding increase in reserve balances held by the banking system.
http://www.federalreserve.gov/faqs/money_12853.htm

The Fed was created by congress, operates with congressional oversight, performing duties set out by congress. It makes money from interest paid by the government, and remits most of it right back to the government

.

[MonteQuest]

The Fed was created by congress, operates with congressional oversight, performing duties set out by congress. It makes money from interest paid by the government, and remits most of it right back to the government

So? I know all that. Doesn't answer my question.

[Pops]

The money will be worthless. It has often been a paradox that the worse an economy turns down, the higher the currency rises. But it is a bell curve. Where have we heard that term before? In a flight to quality, people want cash and dump assets. The US dollar rose to record highs during the Great Depression. If the currency rises too high, and the economy has no hope of survival, then it reverses and collapses into dust.

Still looking for an answer to my question: If all money is debt, and debt defaults and repayments destroy the money created, what prevents the money supply from going to zero when all debt defaults and/or all debts are paid?

Looks like you started out on your hobby horse but fell off jumping the first logical hurdle, lol

Money won't become worthless in a deflation, by definition it will be worth more relative to assets.

Since fiat money, cash, would be the only money left standing after bank loans/deposits cancel out like an anti-matter bomb, it will, as they say, be king.

[Pops]

Here are some interesting depression stats.
Demand deposits fell from $23B-$15B in the first 3 years of the depression and then increased 50% by '40.
Currency in circulation increased through 33, almost doubling from just under $5B to almost $10B by '40
Prices are estimated to have fallen about a third, between 1929 and '33.

So bank money evaporated as expected at first under "austerity".
But currency in circulation increased, albeit in fits and starts, which is a surprise (even though that was my theory, lol) Of course policy was all over the map too

http://www.sjsu.edu/faculty/watkins/depmon.htm

[MonteQuest]

Looks like you started out on your hobby horse but fell off jumping the first logical hurdle, lol

You only read far enough to disagree.
It has often been a paradox that the worse an economy turns down, the higher the currency rises. But it is a bell curve. Where have we heard that term before? In a flight to quality, people want cash and dump assets. The US dollar rose to record highs during the Great Depression. If the currency rises too high, and the economy has no hope of survival, then it reverses and collapses into dust.

Since fiat money, cash, would be the only money left standing after bank loans/deposits cancel out like an anti-matter bomb, it will, as they say, be king.

I think cigarettes and liquor will rule. And sex.

[MonteQuest]

Here are some interesting depression stats.

The biggest problem with this discussion is we have no historical precedent upon which to draw. You can google permanent deflation all day and never get a hit. The debt-based monetary system was designed around infinite growth. What will happen when that growth is no longer possible? How will they massage the system?

I cannot envision anyway it can still stand. Shit, it can't stand with growth!

I admire and appreciate your civility, Pops!

[Shaved Monkey]

There arent many levers left to pull
Interest rates are so low they have no effect,austerity just makes people angry and shop less.
Its going to get interesting if we cop another big quick dip.
The only short term fix left is massive spending by government on infrastructure but only if its deflation and high unemployment.
Long term is something no one want to think about.
Its bankruptcy,closed borders, closed markets, nationalisation of important infrastructure...but only if you can feed yourself or can fight off those who are angry,hungry and armed.

[MonteQuest]

There arent many levers left to pull

And that's now. We never know how the monkeys will react.

[Quinny]

So cash will be King, but the debit card won't work?

The money will be worthless. It has often been a paradox that the worse an economy turns down, the higher the currency rises. But it is a bell curve. Where have we heard that term before? In a flight to quality, people want cash and dump assets. The US dollar rose to record highs during the Great Depression. If the currency rises too high, and the economy has no hope of survival, then it reverses and collapses into dust.

Still looking for an answer to my question: If all money is debt, and debt defaults and repayments destroy the money created, what prevents the money supply from going to zero when all debt defaults and/or all debts are paid?

Looks like you started out on your hobby horse but fell off jumping the first logical hurdle, lol

Money won't become worthless in a deflation, by definition it will be worth more relative to assets.

Since fiat money, cash, would be the only money left standing after bank loans/deposits cancel out like an anti-matter bomb, it will, as they say, be king.

[ralfy]

This might also help:

the-myth-of-the-money-multiplier-t67257.html

That is, there is supposed to be a money multiplier that does not allow total money stock to reach a certain point given fractional reserve banking. And yet M2 is many times higher.

[Pops]

The difference with the buck in the GD was it was backed by gold at least until '34.
Prices fell until then but turned around and rose thereafter.
So deflation then inflation.

[Tanada]

The difference with the buck in the GD was it was backed by gold at least until '34.
Prices fell until then but turned around and rose thereafter.
So deflation then inflation.

Correct, if you look at the actual numbers from say 1620-1933 prices of base commodities like wheat and labor were remarkably stable. Every time we got a little inflation shortly after we would get a little deflation and things returned to normal baseline.

[Pops]

There arent many levers left to pull

In the US Fed Pres Greenspan had the Randian idea the markets would police themselves. Pres Bernanke though we had reached the Great Moderation where our skills manipulating the levers made the business cycle passé...

After they were proven wrong, the main objective of the government bailout was to make sure Jamie Dimon received his next bonus check. In doing so it bought up all the Banks intentionally bad bets and in the process, loaded up their accounts in the Fed's "vault" with $2.5T in excess bank reserves.

Those funds are doing nothing but earning interest. That in itself is a not insignificant fact, the gov is now paying the banks to not loan money. It the new New Deal, only this time it is make work for bankers, exactly the same as the farm commodity supports of the '30s. Now, bankers are the new, most important link in the chain.

The interest comes from us of course (the Fed's money is taxpayer money) and the stimulus money sits there stimulating nothing except Lear sales. But it overhangs the economy, paused to jump on the next bubble when interest rates rise above what the Fed is paying. Inflation anyone?

The mortgage debacle was a huge cluster and the guilt spreads far and wide, but the phrase "willing suspension of disbelief" comes to mind. What it says to me mostly though is we are on our own and SO WHAT DO WE DO is try for as much independence from the system as possible without going all Kazinski.

I think put away some cash, a few months worth if you can, inflation isn't too bad right now and is just the price you pay for the independence from the banks. Maybe buy some very small denomination PMs before they rise again— I don't have any. I'd rather have $1,000 worth of the Mormon basic foods stored than an ounce of gold — whole grains, beans, oils, sugars. Practice cooking them. Have a way to cook.

Personally, my biggest goal has always been to own a piece of land as free and clear as possible. In my mind, something, anything, is better than being homeless. You won't save any "wealth" because if things fall apart asset values will have disappeared but you will have a place to squat. I realise everyone can't own a place, sorry.

Beyond that the list is the same as it ever was: tools, skills, knowledge.

The Mormons say
The prudent see danger and take refuge, while the simple just keep going and suffer for it.

[Pops]

I admire and appreciate your civility, Pops!

Thanks, Monte.

Once a person gets used to the idea their opinion is nothing but opinion, civility becomes pretty easy, LOL

.