mgeoffriau

iTrader: (7)

That's basically what I thought based on your posts. It's not far at all from where I am, actually. I'm intrigued by the anarcho-capitalist position, as I see a lot of internal consistency in it and some very persuasive arguments, but at heart I remain more of a minarchist, both because presenting positions as "limited govt" rather than "no govt" has a better chance of actually influencing real world politics, and also because I believe that anarcho-capitalism is in conflict with my religious views, which state that the government is instituted by God to enforce justice (ie, to punish wrongdoers, not to "level the playing field").

All that to say, glad I wasn't misrepresenting your position.

JasonC SBB

That the "repeal of G-S" was the deregulation that caused the economic crisis is a red herring.

1) Only 1 part of G-S was repealed - the part that investment banks and commercial banks can't be under the same parent business.

2) There were plenty of investment-only banks and plenty of commercial-only banks that failed due to excessive risk taking before the repeal of that part of G-S. Long Term Capital Management was a huge one, in the 90s, and Greenspan bailed them out. AFAIK in Canada there is no such restriction a la G-S, and their banking system didn't have the same bubble.

3) The real cause of the crash was the preceding bubble which was caused by:
a) central bank inflation (creation of money which *always* eventually appear as *new* loanable funds) with manipulation of interest rates down

b) institutionalization of Moral Hazard (I take risks now and reap the profits, but if I fail the taxpayer pays, e.g. "too big to fail")

c) Gov't edicts which interfered with the free market (e.g. the market figured out that 20% downpayment on mortgages makes them safe, and gov't passed laws to lower them in order to "help the poor buy homes")





AFAIK there was no prior regulation that limited futures contracts. So there was no "de-regulation".

In a true free market, there will be no limitations on transactions involving futures or derivatives (as long as there is no fraud of course, like in the case of the Goldman Sachs guy who admitted to recommending certain stocks while sending private emails to colleagues saying the were pieces of ****). But there will be no bailouts if they fail.

Entering a futures transaction involves risk like any other stock purchase. What would limit the amount of contracts entered, and the leverage ratios, is the risk the firm is willing to take on. What is now distorting that is the MORAL HAZARD the Federal Reserve creates. The FedRes will bail out the "too big to fail" firms when the risk bites them in the ***. Likewise selling "puts" aka selling insurance against price drops of chunks of securities or mortgages, like what AIG did (and backed by Goldman Sachs), is risky. Their mathematical model showed low risk, assuming that there would be a bunch of uncorrelated mortgage defaults. However, the risk was actually high, because of the bubble created by the FedRes, which leads to a crash, and you will get a ****-ton more mortgage defaults than in a system where there was no central bank that printed boatloads of money "to stimulate the economy" (which is what created the bubble in the first place).

A properly functioning futures market smooths out price fluctuations.

Let's say Savington's big fat **** radiator's biggest cost is the raw aluminum. He thinks that aluminum prices are very low now and will go way up in the future. He can enter into a contract with an aluminum producer to buy aluminum at some higher price than today's prices, but which are lower than what Sav thinks it will be after prices rise. This is a futures contract. This transaction between Sav and the aluminum supplier is *voluntary*. The aluminum supplier sees this as a guaranteed income, even if his future income may be less than otherwise. If Sav guesses wrong he will have paid more for aluminum. If he guesses right, he has an advantage over his radiator competition. Savington, in buying aluminum today at a higher price, will have bidded up the price of aluminum, so for other buyers it raises the price of Aluminum. However, when prices DO go up, Sav isn't there bidding the price up, and so the peak of the prices will not be as high as otherwise.

Even if the price fluctuation is predictable and cyclical, (e.g. the price of produce in winter is higher), the futures market smooths price fluctuations. Some buyers will prefer to buy futures to get lower prices in winter at the expense of higher prices in summer. Sellers who enter the contracts prefer to be paid more in summer, at the expense of lower prices in winter. The key here is that the transaction is voluntary for all parties. "Deal or no deal".

What screws it all up is the FedRes. While they ostensibly have limits on leverage, here is a case of centralized economic command and control, you assume a bunch of bureaucrats know better than all others. The firms are lulled into thinking maxing out leverage to the limits of what the FedRes says is "safe", AND they know if they follow the law, they can't be sued and they also know they will be bailed out. Additionally, the money floating around the system that gets used for betting, is all this new money printed by the FedRes.

Braineack

iTrader: (62)

not limited to CA, dont forget EU.

mgeoffriau

iTrader: (7)

Scrappy Jack

iTrader: (2)

Can you walk me through the conclusion you are drawing from that graph?

mgeoffriau

iTrader: (7)

What's unclear about it? It's got labels, doesn't it?

JasonC SBB

Debt per taxpayer, ~$150k each AFAIK.
Add in unfunded liabilites, another ~$850k each over the next 30 years (most of which is Medicare). Note that SS "assets" are Treasury bonds ... which are IOUs = more debt. $850k each is the cost of gov't promises that have been made, ON TOP of existing taxes. Does the average taxpayer have an additional $850k over the next 30 years to pay for the entitlements gov't promised? And no, even if you taxed the top 10% earners at 100%, it cannot be paid.

The debt is UNPAYABLE. The only ways out are:
- default
- hyperinflation
- 30% across the board cut in gov't expenses, BEFORE interest rates rocket

This is in order of likelihood. The circus we had in DC over 1% budget cuts, convinces me that a 30% budget cut is politically impossible.

I don't think it will be hyperinflation because it's not in the interests of the powers-that-be. When the money dies, the power dies.

Historically empires collapse when the cost of paying interest on the debt rises to exceed the military budget. (google Niall Ferguson). Right now about 7% of the Fed Gov budget goes to interest payments alone. When the creditors to the US Gov realize they've been loaning to a deadbeat, the interest they charge will rise. And the 7% allocated to servicing debt, could rocket to 30-40%. Then the Fed Gov will be forced to seriously cut, and then their lack of budget, means their power will diminish.

They will neither sell nor rent to a non-certified person. There is no law against it.

Scrappy Jack

iTrader: (2)

Based on the order of posts, I am assuming that chart is supposed to show the way in which some accounting will lead to the collapse of the US Federal government. What I am seeing is that someone's debt (not clear if it is private, public or combined) has delevered to, and GDP has recovered to, about the point of 1980 in that data set.

I am not making the connection as to how that leads to a collapse of the US Federal government.

Would it be fair to say that the Social Security Treasury bonds are debt held by the USA and owed to the USA?

This is factually false. It is either an example of rhetorical laziness or a misunderstanding of the current US monetary system. When you understand this (if you don't already), you will have an moment (probably followed by an moment).

The only way a nation like the USA defaults is voluntarily. The USA can never be insolvent or bankrupt otherwise.

So we are all using the same terminology, understand that hyperinflation is a complete rejection of a currency. Traditionally, this is defined as inflation that rises well into the double digits on a monthly or quarterly basis.

I do not believe there has been a single instance of a nation using the same sort of monetary system as the USA experiencing a currency rejection. That is not to say it cannot happen in the USA, but it would almost surely require some exogenous shock - like losing a major war.

In fact, if anyone can find me an example of a country which was the sovereign and monopoly issuer of the sole, free-float currency in which its debt was denominated that did experience a currency rejection, I will PayPal you $20 USD.

It is important to distinguish that from high inflation which might be measured in high single or low double digits on a year-over-year basis.

Under what kind of a scenario are interest rates on US Treasury securities going to rise materially (e.g. 10-year Treasury yield goes from ~2% to ~5%)? Think about the mechanics involved or the macro economic environment that would have to exist.

It will be a sustained rise in core CPI that will lead the interest rates on US Treasury securities higher because that is what will cause the Federal Reserve to raise its Fed Funds target rate.

There is a 0.97 correlation between the Fed Funds Rate and the 2-year Treasury yield between 1971-08 and 2011-08. The correlation with the FFR and the 10-year yield is 0.88. Said another way, the bond vigalantes have about 12% influence on 10-year yields and the Fed has about 88%.

For a US Treasury auction to be successful, it needs a 1:1 coverage ratio. That's it. Because the Federal Reserve and US Treasury are in constant communication about reserve requirements and because of the nature of primary dealers, it would require some sort of ****-up (to use a technical term) for an auction to fail.

JasonC SBB

Gold *does* have value but that's not the point. The difference between gold or gold-backed money, and unbacked paper money, is that gold is very expensive to mine, whereas paper money costs nothing to produce. And those that enjoy a gov't-granted monopoly on printing fiat money will wield enormous power and will get rich. The gold supply expands very slowly and relatively predictably, whereas a paper money supply depends on the whims of the politicians and some gray haired men with PhD's.

Realize that gold and silver became money not because governments said so, but because the market said so. Gold and silver became the most popular money because of its features that make it useful as money - it rose organically. Governments later wanted a piece of the action and put their emperor's faces on gold coins.

As the number of goods and transactions increase faster than the growth of the gold supply, prices denominated in gold, would drop. Because this is a fairly steady rate, it will not be disruptive. Economies will function. Steady, slow, predictable deflation is not a bad thing - look at all the flourishing electronics companies even though LCD monitor and memory prices keep dropping. The money you save today, will be more valuable tomorrow. Imagine a world where you could save your money for retirement in the bank and it would gain value over time instead of shrinking over time. No need to try to "beat inflation" and "play stockbroker". Imagine prices of almost all goods dropping over time the same way memory and laptops do.

The important thing is you don't have a central authority that can manufacture money out of nothing in order to benefit themselves and their buddies. The people are free to decide what to use as money.

Imagine if there were no restrictions on what we could use as money, paper or otherwise. A lot of people would leave the USD due to the Federal Reserve's recent inflation (with price inflation waiting in the wings), and a lot of people would probably adopt the Yen. Ask for salaries in Yen, save their money in Yen. Some might say gold or silver (however because neither is used as money today, their prices are volatile). BTW if we had a gold-backed currency, the economy would "back" the currency and its value fluctuations would be very small.

If the Federal Reserve quit inflating, the USD would be very stable and it would be great as money. Its value would increase over time. However, the powers-that-be benefit immensely from inflation, so they will not stop inflating.

It's not a question of "allowing" - it's the Federal Reserve system, and the regulatory system, that creates artificial economies of scale. The system encourages corporations to get bigger.

Propagandastic implicit assumptions in that statement.
There is no need to "throw out" the USD. Only that legal tender laws are repealed, so that the Federal Reserve's currency would have to compete with others. Competition would limit their incentive to inflate.

Here's a good read to understand why central control of money benefits the politicians and its cronies:
Why the State Demands Control of Money
http://mises.org/daily/5749/Why-the-...ntrol-of-Money

gearhead_318

iTrader: (1)

I was watching "American Guns" earlier, and the guy offered to buy a gun from a collector in cash plus a piece of silver (not a coin, it was rectangular and stamped with something). You don't have to use the USD, or any currency for that matter, you always have the choice of trading if you want to. Thought I'd throw it out there.

JasonC SBB

The point is that the SS money oldsters had put in that was supposed to have been invested, got "invested" in Treasury bonds aka IOUs from the gov't. Meaning, gov't borrowed the SS money, and it will have to be repaid back to SS, with more taxes.

"The debt is UNPAYABLE"
Do you actually believe that gov't can cut spending by 30% in order to start paying down the debt? How much price inflation will we get if the Federal Reserve inflates enough to make the external debt payable? That action in itself will make foreign governments not want to buy Treasury debt.

Picture this. Foreign governments are starting to think buying Treasury debt is loaning money to a deadbeat. (Greece's bond rates are >20% now) Interest on Treasury bonds rises to 6-10%. The Federal Reserve has been buying a bunch of T-bonds other nations don't want to buy. It is causing mass inflation (10-15% per year), so they don't want to buy more. The deficit has expanded to 20%, and the gov't checks are going to bounce. What else will the gov't do, if not be forced to cut spending?


The cleanest exit is really outright default. This way the creditors to the US Gov't get a haircut, and they will learn never to loan to governments at low rates. Gov't's will find deficit spending expensive.

JasonC SBB

You're missing the point of legal tender laws. It is *illegal* to refuse Federal Reserve Notes aka USD, as payment. But it is not illegal to *offer* or accept other goods as payment.

If you have a choice to pay for something you want, in goods or in crap, and it's illegal for the seller to refuse crap as payment, would you prefer to pay him in said crap or in something else? After a while, said crap becomes widely circulated as money. And due to monopoly control over money, enormous economic benefits are conferred to gov't and its cronies.

Scrappy Jack

iTrader: (2)

In the operational reality of today's monetary system, the USA is not funded by taxes or bond auctions. The bond auction is a monetary policy tool (allows Fed to target interest rates) and not a funding tool. Taxation affects deficits and drains money supply - it does not fund government spending.

You are still thinking from a gold standard or other revenue-constrained perspective. That is understandable because most people think from that perspective. The current monetary system is only about 40 years old. The primary schools of economic thought come from origins with people like Keynes and Hayek - both of whom structured their frameworks under revenue-constrained systems.

Think about your professors. If the average economist getting airtime today is about 55, his educational foundation was being laid around 1978. Their professors were taught on, and all of the textbooks were still written from, a revenue-constrained model.

The current monetary system is only about 40 years old. Revenue-constrained systems are thousands of years old.

I will have to come back to the public debt another time as it is a bit more complex than I have time to dig in to over breakfast. The point remains that the USA is never bankrupt or insolvent unless it chooses to be. The threat, as you point out, is never "running out of money." You seem know this is true but have not really "internalized it."

The threat is inflation.

To say otherwise is either ignorance or fear-mongering (for political or commercial gain).

You cannot accurately compare Greece (a currency USER) to the USA (a currency ISSUER) in that way. The USA (and Japan, Australia, Canada, the UK) does not operate the same as a household, a business, the state of Iowa or the USA of 1950. The USA does not borrow or fund first and then spend.

Government checks cannot bounce. They can be paid in dollars with less purchasing power, but they will not bounce (barring some political sepukku).

You are misunderstanding the way the US Treasury bond auctions work. I know that sounds incredibly condescending, but it I don't mean it to be. It is a widely misunderstood process. It is not a simple supply-and-demand transaction like a publicly traded stock bid/ask. Up until not long ago, I had never done the in-detailed education myself and they certainly didn't go through it accurately at the business school I attended. I believe I have already posted some primary sources for this and will try to again.

The Fed and the Treasury are in constant communication regarding required reserves. Primary dealers must make a market in Treasuries. Go look at subscription ratios for US Treasury auctions. Barring a ****-up between the Fed and Treasury, they will always be at least 1:1 because the Treasury knows ahead of time what level of required reserves they are targeting.

While not perfect, the simplest example to think about is Japan. Massive deficit spending for almost two decades with government bond yields approaching zero, even as the rest of the world was experiencing significant growth. Ask yourself: in 2005 (when markets and economies appeared to have recovered), why would anyone - let alone enough "people" to fund their spending - buy 10-year Japanese government bonds at 1.5% when the US 10-year was yielding closer to 4.25% and AAA RMBS were yielding even more?

Again, the Fed controls short-term interest rates and has massive influence on longer-term interest rates. Think of a time (post 1971) when US Treasury interest rates were high and then go look at the Fed Funds target rate. If you do not believe me, go to the Federal Reserve's FRED system and download the data and run the correlations for yourself.


China (et al) does not fund US spending. They send us real goods and services and we send them electronic 0s and 1s (trade deficit). For the most part, they cannot buy US companies or infrastructure so they convert those 0.25%-yielding reserves into 2% Treasuries. That is an asset swap. If China left its money as reserves and never bought another US Treasury, the USA would not run out of money.

I am happy to debate the pros and cons of a revenue-constrained monetary system but it is not applicable to the USA. You have to separate prescription ("the US govt can't be trusted with effectively unlimited spending power and should go back to a pegged or commodity-linked currency") and description ("the USA is not revenue constrained").

Try paying your income taxes in silver coins, stamps, bottles of wine, gold bullion or a 1969 Camaro.

Scrappy Jack

iTrader: (2)

I am thinking a moderator may prefer to split this off in to a separate thread ("Let's discuss the modern monetary system in the USA?").

In the meantime, some source reading for those so inclined:
Understanding the Modern Monetary System - Least "academic," easiest to read but still somewhat complex. Do not read this on the computer. Print it out and bring a highlighter and pen. Read it at least twice assuming your head does not explode the first time through. If you are going to read anything, this should be the one.

Can Taxes and Bonds Finance Government Spending? More academic, specific to the funding of government spending.

Setting Interest Rates in the Modern Money Era - Pretty academic, specific to the Opem Market Operations of the Federal Reserve and interest rates.


Note that I am continuing to stick more to the descriptive elements ("this is how things are") Prescriptive elements ("this is how things should be") can vary, but you have to know the operating system before you can correctly diagnose the problem.

JasonC SBB

I recommend these PDFs:

The Mystery of Banking
mises.org/Books/mysteryofbanking.pdf

The Case Against the Fed
mises.org/books/fed.pdf

What Has Government Done to Our Money
mises.org/rothbard/rothmoney.pdf

The Gold Wars
www.garynorth.com/GoldWars.pdf

JasonC SBB

Pls. explain.

I've been saying this all along.
Inflation steals from all those with a fixed income and those who save.
Inflation makes saving for retirement very difficult for most.
Additionally politicians kick the can down the road. They just think they can print and spend, and increase gov't spending without limit.
The government's cronies benefit from the monetary system.

How many % of GDP does the gov't consume today, and how sustainable is it?
How much longer do you think the current system can be sustained?
Do you think there's a breaking point where the whole system threatens to collapse?

JasonC SBB

For those who prefer audio-visuals to understand the monetary system, here are a couple of short videos.

"THE CRASH COURSE"
Start here "What is Money":
http://www.chrismartenson.com/crashc...r-6-what-money

Braineack

iTrader: (62)

Why can't you compare the two, or even say Anguilla for example, in the way that fiscal ruin is inevitable when government spending grows faster than the productive part of the economy and by contrast countries like Canada or Ireland, who decreased spending as a share of gdp, are doing better?

regardless if they can pad their own banks with 1 and 0s...

Scrappy Jack

iTrader: (2)

I started typing out a long reply, but I should establish something first:

Are we all in agreement that - whether it is via keystrokes to the various banks and primary dealers or via physical printing press - the Federal Reserve just creates money out of thin air?

Braineack

iTrader: (62)

i believe so. so far as I'm concerned.