Karl,

Do you really believe this is gonna happen? Unless it is forced on them, this is a non-starter.

Yeah, but the FSA wouldn't get their free ****. And this administration is all about giving ass-sitters their free ****.

NBER wrote..

If low interest rates can’t motivate jittery consumers, then the answer may be the opposite: an increase in borrowing costs. Such a shift “can boost inflationary expectations and therefore foster employment,” said Stephanie Schmitt-Grohe and Martin Uribe in the study published Nov. 19 by the National Bureau of Economic Research in Cambridge, Mass.

“By its effect on real wages, future inflation stimulates employment, thereby lifting the economy out of the slump,” they said.

An expectation of future inflation increases current employment because prices will go up increasing profits?
EDIT: Real wages go down so you can hire more people, maybe.

Quote:

The over-levered went bankrupt.

Now the over-levered run the show. So that won't happen again.

Let me throw this logic out.

Higher interest rates will cause the price of financed items to drop. When prices drop those with cash will buy with cash thus causing money to move about in the system.

Flap

As much as I would like to see higher interest rates, it will kill any attempt to balance the budget due to the huge increase in US interest payments. Our politicians (and the Fed which is also made up of politicians) have managed to get themselves into a box that will be almost impossible to get out of.

"The over-levered went bankrupt"

The whole world is now over-levered.

I agreee that this should happen but, the whole world has gone down this road. It will happen only because something FORCED it to happen or they run out of "levers" to pull.

My "Capatain Obvious" says it will continue until it breaks.

Quote:

My "Capatain Obvious" says it will continue until it breaks.

I think you are right. No "creditor" can really foreclose on any "debtor" because that would expose that the debtor has zero which means the creditor has zero as well. It's like you've fallen into a 1000 foot deep crevasse and managed to survive only to find that you have no chance in hell of getting yourself out and there's no chance in hell of someone getting to you to rescue you.

It is the ultimate "Wedgie".

Flap

They are still using the phrasing and terms of Keynesianism, confidence, fear of deflation and such. That totally mis-diagnoses the cause and cure of the disease. Which was and is the mis-allocation of capital caused by manipulated interest rates.

>The only reason it was not called "A Depression" is that it didn't last long enough to qualify.<

or

The only reason it was not called "A Depression" is the cure fixed it too quickly to qualify.

"The over-levered went bankrupt."

I wonder, who were the over-levered back then? The over-levered now are being protected from bankruptcy because they effectively own those who would do the right thing and allow them to fail.

Didn't the Fed begin to aggressively cut rates in the second half of 1921, contributing to a sizeable expansion in the money supply from 1922-24?

What we learn from history is that people don't learn from history. 'They' are soooooo much smarter now.
Ain't gonna be 'fixed' any time soon. The current crop of politicans are geared to prevent any necessary pain that would be necessary to return to a healthy economy. (One where those who erred are held responsible and punished by law enforcement or the market for their bad actions / decisions. The bad players are gone and those of us who can produce our products won't be carrying the extra burden asked to fix this disaster.)

"As much as I would like to see higher interest rates, it will kill any attempt to balance the budget due to the huge increase in US interest payments."

Rates can't be stopped forever from rising. The longer the rates stay low, the more debt the government piles up, preventing the budget from ever being balanced.

The longer something goes on, the greater the damage done- the bigger the boom, the bigger the bust.

@R2judge

Totally agree...it is just that my "Captain Obvious" is saying to me..."I hope your long term deflation investing strategy kicks in before you retire"...LOL

"What we learn from history is that people don't learn from history."

What we learn from history is that people ignore history when it gets in the way of what they want.

Greenspan wrote in the 1960's that 1920's FED policy lead into the Great Depression. Not re-doing 1920's FED policy would have gotten in the way of what Greenspan and the politicians wanted to do, when Greenspan was in charge of the FED. So they ignored history.

Greenspan lied when he said he couldn't see a bubble before it burst. He didn't fail to learn from history. He wanted a bubble, then another bubble.
Greenspan knew housing was in a bubble when he said it was only frothy.
Greenspan learned from history, but he needed another bubble to goose the economy after the Nasdaq bubble he facilitated, burst.

In 2005, the bankers got the bankruptcy laws changed. They knew what was coming. They didn't fail to learn from history. In 2005, Greenspan was praising liar loans as the means by which people who could otherwise not be able to afford a house, were able to do so. Greenspan knew that the people who otherwise could not afford to buy a house were going to lose those homes. Greenspan did not fail to learn from history, he then handed off to Bernanke, to be the fall guy for the crash Greenspan knew was coming.

Greenspan then spent his time blaming anyone but himself for the financial disaster he facilitated.

Greenspan didn't fail to learn from history, he took advantage of history.

The front story in the WSJ is about student debt, and the debt for those who dropped out and didn't get a degree. Last night I'm listening to some college kids, one's a psych major, one is in management, the other is ethnic studies. It is strange how few correlate the degree to future earnings potential, unless, that is, if their parents are functional and help out. Or, they taught them something about economics.

The college students should be able to think: that's a worthwhile investment, and that's a waste, although it might be interesting, in which case they can get some books at the library.

Expecting someone to exhibit critical thinking skills to pass college is racist.

That's unfortunate.
You know what, this is a good time for students to be learning by barter, for useful skills. In groups, with older experienced people to teach, and no tuition or much cheaper tuition. Some online, some not. The Khan Academy has done that for math and some other subjects, all online and free, because a silicon valley guy had the money and made it happen. You should be able to go a step further and issue degrees. The Khan academy is not College level.
In pharmacy there's an accrediting body that's like a government, parasitical, and they take in fees to check that you've met their requirements for a degree. I bet the other degrees have similar, so if you want to buck the trend of what's involved in getting a degree you'd hit a wall of bureacrats. But that's the future... There should not be expensive barricades to getting useful degrees. There is the Cal-state schools here, and they work pretty well although these days it is hard to get the classes you need. I'm just saying that higher education needs a re-set. This should include teaching Austrian economics rather than garbage economics.

Current policy is specificly intended to allow big fish to reposition themselves in order to take advantage of the next step in policy, which is to reconcile ratios. IMO we are going to hyperinflate a la late 1970's, only worse. Total Debt to GDP ratio must be brought back down to the 80-120% range. Massive credit defaults will not be tolerated. Hence, inflation as policy. See you all at gas = $10/US Gallon and other lovely consumer price points.

Nope.

Such an attempt will lead to literal revolution and the powers that be know it.

They'd LIKE to make such an attempt but the margin between income and cost of living will not permit it.

I wouldn't make 1920 as simple as 1920 has been made. What was going in the war era was excessive speculation. Murray Rothbard wrote a book called America's Great Depression. He covers this period. As mentioned above, the Fed decided to buy some government paper assets after squeezing the speculation out of the market and liquidating the speculation. They didn't do it for stimulation according to Rothbard, but that was what they got.

There had been a lot of money piled up in the US from World War I. We got into World War I to lend money to France and Britain. This was actually the start of the credit bubble that led to the boom of the 1920's and Wall Street started creating circular debt by lending money to Europe and it cycling back in trade. They loaned money to Germany so they could pay France and Britain, so France and Britain could pay the War debt interest. You can read about this in "A Bubble That Broke the World" by Garet Garrett, a free download on mises.org.

Hoover got involved as Secretary of Commerce. They created a term known as "price stability". Price stability meant they decided what prices were going to be and manipulated markets to attempt to achieve those prices. In short, they were stable if they didn't go down. The subprime bubble of the 1920's was various government debt in Europe. Wall Street roamed Europe and non NYC banks to match money with junk. It was Greece ala the 1920's. They also created consumer credit in the 1920's.

There were other things that went on. Britain went back on the gold standard, attempting to match the pre war exchange rate, while credit had expanded significantly. This is part of the error the gold standard doesn't work. It would always work if the bankers didn't issue unbacked notes. The Fed president and the Bank of England head, Norman were pals and the Fed got involved in propping the Pound.

What was called a failure of capitalism was actually a failure of government intervention. Intervention provided the same idea we have today, that government has the power to make pigs fly. By the end of the 1920's, capacity was off the charts, there were surpluses piling up in commodities, Europe went broke and couldn't pay and the paper peddled by Wall Street turned into what it was, pure crap.

Bankers face a different problem than the public when it comes to money. They get all their new money for nothing, but they have to get it back or it is a loss. Inflation isn't that big a problem for bankers, because the losses they suffer on the assets are counterbalanced by the gains they receive on their liabilities. The less capital they have, the less they are exposed, but the greater the risk of failure. When leveraged 20 to 1, a 1% net spread produces a 20% return on their capital, while ZIRP produces a 2% loss for their depositors in a 2% inflation. If we were wedded to the risks of bankers, there would be a lot more vigilence in using banks. (we are, but in a different way, as someone has to pay the losses incurred on the money created by bankers when the bank goes broke. It is not a zero sum game, as technically the money actually ceases to exist in real terms, though it is there in nominal terms. The loss is always paid by those that sustain the losses. All the money there is, is all the money there is and debts can only be paid out of the money their is or the property associated with the system. We will pay)

The $64,000 question is what would interest rates be if there wasn't Fed interference? They might be pretty low on treasuries, if the government was operating in a responsible manner, but how many banks would there be enough trust to give them money at zero or near zero? Anyone here put their money (gold or FRN's) in the US banking system without deposit insurance? Remember, the dam has already broken and it was built on deposit insurance. But, if there wasn't deposit insurance we would be looking at a much more stable banking system, because people would be watching the banks they put money into. I doubt BAC could borrow money at under 5% and only then if the government was going to guarantee the top 20% of the loans.

In this case, the interest rate would be equal to what banks would have to pay to attract funds. As long as Bernanke is putting in free money, rates are going to be low. Because Bernanke is putting in more free money, it indicates the rate is too low. When money ceases to have a time value, it is really even money, even if it is credit money?

I listened to Steve Keen on Capital Accounts twice. I wanted to hear his version of the banking system again. Steve said something I somewhat agree with and disagree with at the same time. He said that fractional reserve was a fiction. What is in the bank is owed to the existing customers, but there is that slice that is represented by the capital accounts of banks. If a bank has $9.5 million in liabilities, $500K in capital and $10 million in assets, $9.5 million is allocated to liabilities and $500K of assets to capital. Should the bank make $1 million in loans, the figures change to $10.5 million, $500 million on the credit side and $11 million on the asset side. Then, should $500 million of the new money change banks, the new balance sheet temporarily would be $10 million and $500 million on the credit side and $10.5 million on the asset side. If they had $500 million in reserves, they would all be gone, as they would either show up on the balance sheet of another banks ledger or in the pockets of customers in the form of FRN's. Once a bank was out of cash, it would be required to borrow cash from another bank. Reserves have little to do with lending and all to do with transferring liabilities.

The great secret is that reserves do not earn interest. Thus the more reserves there are in the system, the more dead money there is in the system. The bank can buy assets with the money, but the money ends up in another bank. The Fed is starving banks of the needed revenue and the banks are going to make it up somewhere. The only benefit is there is a corresponding liability, but this is merely tied up inventory.

Karl is correct. There isn't room for much debt expansion. When the government runs into trouble, they will take care of themselves.

Gen, I fully appreciate the arguement that "the margin between income and cost of living will not permit it", however rationality is not what makes policy, power does. Left with the decision as to either selecting to die by fire or ice, people still make a selection which their illusion favors regardless of the certain end result.