Generational Dynamics Forum - New Site

Reality Check wrote:Am I missing something here ?

Starting with the first paragraph I wrote at the top of your last post, I think you are correct to mention that the wealthy investors look at more than just whether the government has the potential to increase the debt. However, whether the government has the potential to increase the debt is, in my view, a necessary condition and is the key factor they are looking at now. We see the attention that Immelt and Buffet draw to that factor in the CNBC transcript from last week. Looking at Simpson-Bowles, it's evident that there is a consensus that the US can still run deficits of about 3-4 percent per year (short term), or perhaps $500 billion. http://www.cbpp.org/cms/index.cfm?fa=view&id=3844 One thing I'm suspicious of is that they would like to tweak the longer term numbers toward higher deficits. Overall, I think CEOs and wealthy investors look at the US economy like a 3-legged stool where the 3 legs are US government fiscal policy, Fed monetary policy, and the private economy. They are separate but related. At this time, the primary concern of CEOs and wealthy investors seems to be about fiscal policy. Monetary policy is seen to be adequate. The basic consensus there seems to be that Bernanke has saved the banking system and there is adequate liquidity and low enough interest rates to cover any needs. There's one issue in your line of reasoning about reserves that you may want to look into. The theory you mention, which is standard, is that the reserves come first, then they are multplied. There are economists who have studied this process as it's happened recently in our modern banking system. One is Steve Keen from Australia and he has a blog where there is a paper posted explaining what he found. He found that in reality, when a bank wants to make a loan, the loan will be made whether the necessary reserves are available or not. Once the loan is made, the bank will then find the necessary reserves. If CEOS and wealthy investors really do view reserves in this manner, then they are probably not too worried about the excess reserves being multiplied because loan demand rather than reserves is the rate limiting step in the process.

Higgenbotham wrote: (U.S.) government has the potential to increase the debt (implying the Federal Government has the ability to continue spending as much as they do now)

I do not believe any serious person is arguing the U.S. does not have that capacity. Japan's government has a total debt of, say 2.5, times the U.S. total debt ( as a percentage of GDP ) and they are still borrowing. Japan's external debt is in the same ball park as the U.S. total debt, as a percentage of GDP. The capacity is a non-issue and the range of what will be done, politically, is as you state, fairly narrow. This is nothing new Japan has been here before.

Higgenbotham wrote:There's one issue in your line of reasoning about reserves that you may want to look into ... that the reserves come first ...

Please think about what you just said: "it always happened the other way around". Why is that true? You are looking at the excess reserves ( or the lack of them as a has always been the case between 1960 and 2010 ) and saying we must think of them only as a limiting factor, because we always had to do that in the past. But look at the big picture - what huge assumption has changed ? What one thing huge thing is no longer the same as it has been between 1960 and 2010.

Then also consider this:http://generationaldynamics.com/forum/v ... =14&t=1680

Reality Check wrote:

Higgenbotham wrote: (U.S.) government has the potential to increase the debt (implying the Federal Government has the ability to continue spending as much as they do now)

I do not believe any serious person is arguing the U.S. does not have that capacity.

I would compare what you are saying to assessing a person who has a small lung tumor.

I am saying the equivalent of that the person is deciding whether they may want to quit smoking or face much greater problems in the future.

You are saying the person does not need to quit smoking because their neighbor was in a similar situation a few years ago and he is still smoking and still alive.

Of course, we can run up our debt like Japan did. But I think the consensus is that if we do, the US will slip as a world power like Japan has.

Reality Check wrote:

Higgenbotham wrote:There's one issue in your line of reasoning about reserves that you may want to look into ... that the reserves come first ...

Please think about what you just said: "it always happened the other way around". Why is that true? You are looking at the excess reserves ( or the lack of them as a has always been the case between 1960 and 2010 ) and saying we must think of them only as a limiting factor, because we always had to do that in the past. But look at the big picture - what huge assumption has changed ? What one thing huge thing is no longer the same as it has been between 1960 and 2010.

Then also consider this:http://generationaldynamics.com/forum/v ... =14&t=1680

No, I said "because loan demand rather than reserves is the rate limiting step in the process". This means it is loan demand that is the limiting factor, whether there are excess reserves or not.

Higgenbotham wrote: This means it is loan demand that is the limiting factor, whether there are excess reserves or not.

You missed my point.

My point is that we have an example of what will happen if we keep kicking the can down the road like Japan did. The current level of Federal Government Spending, by itself will not push us into a crisis. We have seen that movie before it is Japan, and it is a slow death.

But there is at least one thing here we have not seen before, the Massive Excess Reserves under the total control of the same people who created the Financial Crisis.

We should not limit our thinking to just what happened when those excess reserves did not exist during the period of 1960 to 2010. We should think outside the 1960 to 2010 box.

Higgenbotham wrote: I would compare what you are saying to assessing a person who has a small lung tumor.

...
The same people that created the financial crisis are still in control of the banks ( both investment banks and most of the deposits of the traditional banking system as well ) thanks to the consolidation ( and growth ) of the too big to fail banks ( the Investment/Conventional bank hybrids).

The U.S. government guarantee of deposits at banks has been extended to the Investment Banks as well, as part of the initial Emergency Response to the Crisis of 2007-20??.

The toxic assets are still on the books of some bank holding companies - as noted here:http://generationaldynamics.com/forum/v ... =14&t=1680

Those toxic assets are still on the bank's books at face value, not fair market value ( another initial Emergency Response to the Crisis of 2007-20?? that is still in place ).

Dodd-Frank requires the banks ( one could also say it grants the banks the opportunity ) to write their own pre-packaged bankruptcy plan to "reorganize the bank and pick winners and losers" among their creditors ( account holders are merely creditors -as MF Global customers with cash in their accounts discovered ).

Unlike the period of 1960 to 2010, these same bankers have total control of 1.4 Trillion of the U.S. Monetary Base in the form of Excess Reserves in their Federal Reserve accounts.

The Toxic Assets are a strong incentive to restructure their banks into good bank holding companies they keep and bad bank holding companies where the toxic assets stay - sort of like the GM structured bankruptcy.

With the 1.4 Trillion in excess reserves to work with, this restructuring could be done, inside a Dodd-Frank reorganization, outside a Dodd-Frank reorganization, or first outside and then inside.

Dodd-Frank made the executive branch ( Treasury Secretary ) the judge - jury - executioner - and appeals courts - all wrapped into one for pre-packaged Dodd-Frank Bank re-organizations.

Having 1.4 Trillion cold hard cash available to move assets between bank holding companies before the "needed" re-organization is a nice perk - and that 1.4 Trillion still shows up in the same place on the Fed Balance Sheet - regardless of which financial institution has the "Excess Reserves". Because the 1.4 Trillion is "excess" reserves, rather than "required reserves", the money is not required to stay in the same bank holding company as any particular set of fractional reserve bank deposits.

We should not be insisting that the actions that will be taken as part of this ongoing crisis, are the same as would have been taken before Dodd-Frank, and before Trillions of Toxic Assets were on the books of some bank holding companies, and

and before this was available to the bankers who created the financial crisis ( please note below, it was not available between 1960 and 2010):





Please Note the max Y ( vertical scale ) on the graph below is over 10 TIMES smaller that the one above.

Reality Check wrote:

Higgenbotham wrote: This means it is loan demand that is the limiting factor, whether there are excess reserves or not.

You missed my point.

My point is that we have an example of what will happen if we keep kicking the can down the road like Japan did. The current level of Federal Government Spending, by itself will not push us into a crisis. We have seen that movie before it is Japan, and it is a slow death.

But there is at least one thing here we have not seen before, the Massive Excess Reserves under the total control of the same people who created the Financial Crisis.

We should not limit our thinking to just what happened when those excess reserves did not exist during the period of 1960 to 2010. We should think outside the 1960 to 2010 box.

There isn't much the banks can do to increase loan demand except to lower interest rates to rock bottom or decrease their standards. Here, I'm talking about private sector loan demand from individuals and businesses. The banks are somewhat constrained in doing that, and the Fed has done just about all they can to help.

What you are describing here is not hugely different from situations that have occurred in the past, but it is showing up differently in the accounting. After the Great Depression, many banks became more conservative, of course, and kept large percentages of cash and cash equivalents on hand. Anyone could walk into a bank and ask for the financial statement and if that was done even as late as the early 1990s it was not unheard of to see as much as 35% cash and cash equivalents on the balance sheet of a small community bank still being run by the generations who lived through the Depression. I saw it myself. I also saw those banks get bought out during the boom. The cash and cash equivalents were probably cash and treasury bills held by the bank and not on deposit at the Fed but that's pretty much the same thing as excess reserves. Since treasury bills don't pay hardly any interest now, excess reserves are better for the bank because they pay a little more, whereas in the past treasury bills paid 3-5%, normally.

Currently, banks receive a higher interest rate from holding excess reserves than from holding three-month Treasury bills. As long as the interest rates on reserves and risk-free assets are similar and banks' demand for risk-free assets does not decline, there is no obvious reason why excess reserves will decline.

http://www.frbatlanta.org/cenfis/pubscf ... serves.cfm

http://www.bloomberg.com/markets/rates- ... -bonds/us/

http://www.federalreserve.gov/monetaryp ... lances.htm

At today's quoted yields, excess reserves pay more than all treasury bills and almost as much as 2 year notes.

Holiday Iced
http://www.zerohedge.com/news/2012-11-0 ... -gate-back

As for the Banks they will internally recycle "tranform" this digital bank firewall as premiums deemed capital stock until they unwind it H
This Morass will stay since sweep acounts MM are "have" terminated. This back door taxpayer funded charade will run until the tearups noted
and are cleared. Of course the GAAP will never be questioned in integrity as the LIBOR scape goat fades.
Point being we are funding premium payments of acounts. This will some day be noted as the bubble in the bubble.
They will not allow redemptive OTC payouts. Relationships will split margin to black pools off sheet to redemptive funding
for newer margin pools. Parent to abortive streams for new beta pools. We noted some time ago the implosion rings.
Lighter fluid is all over the hookers already.

aedens wrote:This Morass will stay since sweep acounts MM are "have" terminated. This back door taxpayer funded charade will run until the tearups noted and are cleared.

Two year old post: "We have the Fed usurping the free market and saying that this junk will be walled off and not subjected to market forces and so therefore it is real money. Welcome to the Soviet Union."

RC, we are just going to look at that data differently, I see one lasting bump there when the bretton woods agreement died, and that's about all, the 2008/2009 data is too new to determine if it shows a permanent hump there or not, it's simply far too early to make that determination, everyone is guessing. But the variance of that series is small, and a stock with that performance would be considered dead boring. I will be less surprised if it drops back to the slightly lower level of the 74-75 timeline over the next ten years than if it rises, but we are approaching a cusp on the crisis era, so anything is possible.

I freely admit I'm the outlier here, everyone else expects the federal budget to rise, I expect it to fall along with increasing taxes, and the resultant drop in business activity masked by FED action. But that's how I read it, and I don't have a crystal ball, that's just my opinion.

Higgs, I've been watching the Apple story unfold recently. It appears Windows 8 is pushing Apple back towards where they were fifteen years ago. They need a response to W8 soon. Price is down by about 100$ from the peak which was only six weeks ago. It may be that Apple is the end of the story of the move from building customer relationships to building relationships on Wall Street. I may be seeing things, but I am hopeful for a move to market reality, where products and customers are more important to stock prices than how much schmoozing the CEO does with the boys from the WSJ and MSNBC.