Failed States

JEATON · January 21, 2010, 6:42am

States are fucked…

John_S1 · January 21, 2010, 6:43am

[quote]JEATON wrote:

States are fucked…[/quote]

At least we agree on this. Because whichever one of us is right, the states are still fucked.

dhickey · January 21, 2010, 12:30pm

[quote]JEATON wrote:

[quote]dhickey wrote:

[quote]JEATON wrote:
(coins, paper, and commercial banks reserves with the central bank) plus all the additional money created via credit through fractional lending.
[/quote]
which of these do you think is going to shrink?[/quote]

You know the answer. The additional money created via credit through fractional lending.
Read the above post.[/quote]
i’de like to walk through this step by step.

why is this going to shrink? Supply, demand, or both?

dhickey · January 21, 2010, 12:38pm

[quote]JEATON wrote:

[quote]dhickey wrote:

[quote]JEATON wrote:
(coins, paper, and commercial banks reserves with the central bank) plus all the additional money created via credit through fractional lending.
[/quote]
which of these do you think is going to shrink?[/quote]

You know the answer. The additional money created via credit through fractional lending.
Read the above post.[/quote]
second track. How does fractional reserve banking create money?

are you assuming a banks will fail and the fed will have to print money to cover deposits? If not, I fail to see how deposits and money lent against those deposits should be counted separately. It’s the same dollar.

dhickey · January 21, 2010, 12:41pm

[quote]JEATON wrote:

[quote]dhickey wrote:

[quote]JEATON wrote:
(coins, paper, and commercial banks reserves with the central bank) plus all the additional money created via credit through fractional lending.
[/quote]
which of these do you think is going to shrink?[/quote]

You know the answer. The additional money created via credit through fractional lending.
Read the above post.[/quote]
second track. How does fractional reserve banking create money?

are you assuming a banks will fail and the fed will have to print money to cover deposits? If not, I fail to see how deposits and money lent against those deposits should be counted separately. It’s the same dollar.

dhickey · January 21, 2010, 12:42pm

[quote]JEATON wrote:

[quote]dhickey wrote:

[quote]JEATON wrote:
(coins, paper, and commercial banks reserves with the central bank) plus all the additional money created via credit through fractional lending.
[/quote]
which of these do you think is going to shrink?[/quote]

You know the answer. The additional money created via credit through fractional lending.
Read the above post.[/quote]
second track. How does fractional reserve banking create money?

are you assuming a banks will fail and the fed will have to print money to cover deposits? If not, I fail to see how deposits and money lent against those deposits should be counted separately. It’s the same dollar.

bigflamer · January 21, 2010, 12:58pm

[quote]FightinIrish26 wrote:

[quote]John S. wrote:

[quote]JEATON wrote:
And how is the destruction of the bond market increase money supply? It does not. It decreases it.

John, you are a smart man, but you do not have a deep enough understanding of the processes. You tend to focus on only one or two variables, when there are hundreds.

Every day I am more convinced that deflation is in our future. And every day I pray that it is not.

BTW, gold is only a knee jerk flight to safety for now. The US dollar will be the next large flight to safety (how sad is that?). May be in five or so years that will change. Until then. the dollar.

You have a day where international banking (HSBC, China developments) send a ripple of fear through the markets and is gold up strong? No, gold is down $28 an oz and the dollar is up strong.

As an aside, gold should be at a near term resistance level now. It should bounce. If not, it is definitely not a good sign. [/quote]

You are ignoring the Commercial real estate bubble. once that pops in q2-q3 along with all the dollars being created people are going to make the flight to real money(gold/silver). People ran to the dollar today because America hasn’t begun to feel its real pain yet.

When these states go bankrupt the federal government will bail them out, Using printed money. Deflation is a good thing and needs to happen, but it won’t because the government would be unable to do all its entitlements so we are going to experience inflation and more then likely hyperinflation.[/quote]

Hey guys, you want to stay anywhere near the topic here? Every fuckin thread on this board ends up with a couple of loons wanting to go back to the gold standard again. Can we talk about the damn states for a minute?[/quote]

Care to explain why supporting the gold standard is “loony”? Seems to me that this a large source of the problem for both the states and the fed. Fractional reserve banking, if I understand it correctly, is very much like gambling without all of your bets covered. I would ecncourage you to read Dr. Paul’s book “End The Fed”. Very eye opening.

bigflamer · January 21, 2010, 1:14pm

[quote]MaximusB wrote:
I can tell you the ridiculous ideas California has tried…

IOU’s. No I am not kidding.
Increasing taxes, which we voted down last May. We were dealt a tax increase, but we defeated a tax extention for that increase. Those taxes included car registration fees, property tax, sales tax, and a reduction in tax exemptions for families with children. To give you an idea of the car registration fee, last year I payed $175, this year I paid nearly $400.
Furloughs for government workers, which a judge ruled was unconstitutional. We had courts and DMV offices close for 2 Fridays a month, and the media cried that the sky would fall, as if anyone gives a shit about a DMV worker.
The threat of teacher layoffs, until the unions went ape-shit and screamed that the classrooms would be filled beyond capacity (who cares), and oh the poor children (who rank 49th in performance nationwide, behind only DC). Just a side note, LAUSD pays more than any other school district nationwide, despite the pathetic performance of the school kids.
The threat of laying off and/or reducing both police and fire services, yes the sky is falling yet again. Our Governator would rather keep cubicle workers employed before cops and firemen. [/quote]

This is true everywhere, and is very prevelant in my failing state of Michigan. They (the dirtbag politicians) always try and extort their constituants into a tax hike by threatening a reduction in police and fire. Like clockwork, instead of reducing the fuckers in cubicles and the army of assistants to the assistants, they’d rather cut public safety. It’s all about priorities, and making the hard cuts.

JEATON · January 21, 2010, 1:52pm

[quote]dhickey wrote:

[quote]JEATON wrote:

[quote]dhickey wrote:

[quote]JEATON wrote:
(coins, paper, and commercial banks reserves with the central bank) plus all the additional money created via credit through fractional lending.
[/quote]
which of these do you think is going to shrink?[/quote]

You know the answer. The additional money created via credit through fractional lending.
Read the above post.[/quote]
i’de like to walk through this step by step.

why is this going to shrink? Supply, demand, or both?
[/quote]

It is estimated that less than 5% (actually more like 2% to 3%) of our money supply consist of physical coin and paper money. The rest is created through lending by means of quantitative easing using fractional reserve banking. The remaining lions share is represented by credits and debits on electronic ledger that are moved from bank to bank. This seems to be one of the harder things for people to wrap their heads around. They say things like “the money has to be somewhere. It goes from one mans pocked to another.” It is a misunderstanding. When I ran the largest GM dealer in my zone, we handled millions of dollars in transactions per month. I rarely saw a paper bill.

When things are going well and money velocity is steadily increasing, money supply is increasing. The same dollars are being spent over and over and over again. But remember, the monetary base is not increasing. For demonstration purposes, all this additional money is simply electronic data.

If and when the commercial real estate market implodes, all of this electronic money that is tied to hard assets will be revalued. Money velocity fails to create new money at a faster pace than old money is being destroyed. When a commercial loan goes bad, and the bank eventually has to liquidate the asset, a write down occurs. If a $1 million dollar asset (loan debt) is liquidated for $300,000.00, the the money supply has now decreased by $700,000.00.

Here is a simply explanation as copied from bullnotbull.com:
Mr. Jones Takes out a Sub Prime Loan
Letâ??s say itâ??s 2003, and Mr. Jones, who has less than stellar credit wants to buy a house. He goes to the bank to get a mortgage. The conventional wisdom is that the bank loans him money so he can buy the house. In reality, Mr. Jones is actually borrowing the money from himself, – or rather against his own future earnings. The bank simply facilitates the real estate transaction between him and the house seller. It does this by writing a note that says â??weâ??ve loaned Mr. Jones X dollars and heâ??s promised to pay us the money back over 30 years. We are holding his house as collateral until the money is paid back.â?? This note is called the mortgage, and it becomes the bankâ??s asset. Under Federal Reserve rules, it can use this asset to create the money to pay the seller of the house.

In reality, the bank has no money, and the mortgage has value only because of Mr. Jonesâ??s promise to pay back the money. As long as Mr. Jonesâ??s promise is good, the mortgage will retain its value and the bank can sell it to another investor â?? for example a hedge fund.
The Hedge Fund Buys Mr. Jonesâ??s Mortgage
The hedge fund bought thousands of mortgages like Mr. Jonesâ??s, with the hope of collecting a steady stream of income as borrowers paid off their mortgages. That sounded like a good idea, and a solid bet. People traditionally are very good about paying their mortgages back. No one, after all, wants to lose their home. In fact, it sounded like great idea â?? so great in fact, that Bear Stearns took the $638 million of its investors money, borrowed $10 billion more, (yes, that is a b) and put it all into subprime mortgages.
Mr. Jones Defaults
As it turned out, Mr. Jones, and many more like him were unable to keep their promises to pay the money back. Maybe Mr. Jones lost his job in this terrible economy; maybe he got sick and couldnâ??t work; maybe he didnâ??t understand that his mortgage payment was going to jump to something he couldnâ??t afford; maybe he thought he could sell the house for more money, and never expected to hold on to it this long; maybe he just wasnâ??t a good credit risk to begin with.

Whatever the reason, Mr. Jones and millions like him had to break their promises about paying back the loans. In the end theyâ??ll just give their keys back to the bank and say, â??Thanks, but no thanks. I canâ??t afford it.â??

The banks in turn will say, â??Donâ??t give us the keys. We sold your mortgage a long time ago. We donâ??t even know who owns your mortgage now, and frankly we donâ??t care.â??

Until now, his debt was an asset of the fund, and was being used as collateral against loans ten times its value. But the moment that Mr. Jones gave up on the idea of home ownership, the value of his mortgage simply disappeared. The paper asset, which derived its value from Mr. Jonesâ??s promise, was destroyed. This had a cascading effect, since Mr. Jonesâ??s mortgage was being used as collateral to borrow money to buy even more subprime mortgages, many of which were also defaulting. Assets purchased on borrowed money were now worthless. Only the debts remained, and suddenly there was more debt than the original amount that investors had put into the fund. These original funds would be needed repay the debts incurred by the fund. Nothing is left to return to investors. This is the process by which money is destroyed.

What about the houses, you ask? Yes, they have some value, but not nearly as much as when they were first purchased. Again, it was not the houses that had the value, it was Mr. Jones promise to pay a steady stream of high interest income over 30 years that was valuable to investors.

When money can be created out of thin air, why do people resist the fact that it can disappear into free air just as quick.

These are just a few examples of the mechanisms of money destruction, or deflation. We are not even touching on the psychological components that come into play and begin to accelerate the process on the down side just as easily (if not more so) than they did on the upside.

JEATON · January 21, 2010, 2:03pm

[quote]bigflamer wrote: