From page 4:
" What has been happening: a description
Over the last two decades, much seems to have gone right in the globaleconomy. Inflation has been maintained at very low levels almost everywhereand, until recently, was showing remarkable stability. At the same time, growthhas generally been high, with that in the last four years being the fastest onrecord. Along with these features, economic downturns in the advancedindustrial economies have been so shallow since the early 1980s that theygave rise to the accolade “the Great Moderation”. Moreover, the fact that theadvanced industrial countries had proven so resilient to recurrent episodesof stress in financial markets was hailed as a further indicator of betterfunctioning economies. In particular, the maintenance of low inflation bycredible central banks was seen to have played a crucial stabilising rolethroughout most of the industrial world.
Yet the very mention of financial shocks leads on to two less reassuringquestions. The first is why both the frequency and the magnitude of suchepisodes of financial stress seem to have risen. And the second, sparked inparticular by the events surrounding the distressed hedge fund LTCM in 1998,is whether the centre of the global financial system might eventually prove asvulnerable as the periphery. The events of the past year have demonstratedthat these causes for concern are not misplaced.
The financial turmoil began in the market for US subprime mortgages, andthe markets for structured products based on them. Delinquency rates in thesubprime market had started to rise in early 2005, almost contemporaneouslywith outright declines in house prices, but there was no significant marketresponse to this development until early 2007. Credit spreads on suchproducts then began to widen, rating downgrades increased, and the processaccelerated sharply in August. The trigger, as already mentioned, was thedecision by a small number of investment funds to freeze redemptions, citingan inability to value their complex assets. From this small beginning, thefinancial disruption then fanned out to virtually every corner of the system."
Any comments from an Austrian Economist's view point, especially the underlined?
jimmy:The other aspect of the system (that I'm not too clear about myself, to be honest) is what happens to the Fed's profits. My understanding is that 6% of these go to the shareholders of the Fed (guys like JP Morgan and Chase Manhattan - i.e. Rothschild) and the rest gets incorporated into the Federal budget... so it's not like the interest payments that must be made go into a vacuum - these get injected back into the system by way of the personal expenditure of the banks that receive the 6% and by way of the public spending of the federal entities that get to lump those funds into their balance sheets.
I did a quick google search;
For the four years combined the Federal Reserve collected $92.6 billion in interest on its portfolio of Treasury securities and other government bonds. The Fed also rebated $84.6 billion to the Treasury, which amounted to about 92.5% of its profits. From 1980-97 the Fed has collected about $329 billion in interest from the Treasury. It has also rebated about $327 billion during that period. It seems pretty clear that Federal Reserve profits really are returned to the Treasury. What this means is that Federal Reserve Notes do not cost the Treasury any net interest. ... This key detail essentially means that the bonds held by the Federal Reserve are interest-free loans to the federal government -- the equivalent of printing money.
...
This key detail essentially means that the bonds held by the Federal Reserve are interest-free loans to the federal government -- the equivalent of printing money.
Now to look into this Jacques Jaikaran character.
I know I'm not going to convince "Anonymous Coward", because he's a professional troll or paid disinformation agent. I've seen enough of them to recognize the pattern. If spreading disinformation is your full-time job, it's very easy to create multiple online personalities and make sure sensible discussions degenerate into flamewars. However, I do hope to convince other people who read this thread.
Overreacting, much?
-Jon
I cannot be caged. I cannot be controlled. Understand this as you die, ever pathetic, ever fools.
Irenicus' Diaries.
The tone of the argument about the "compound interest paradox" is surprising. I doubt Mises would ever have argued in such a fashion nor would there be such a requirement. Mises used consumate finesse when presenting an argument. This was made eminently clear to me while reading his book refuting socialism. I often wondered how certain points were related to the purpose of destroying the pro-socialist argument. However, once a conclusion from the line reasoning, developed to refute the particular aspect of the pro-socialist argument he was addressing, was reached, such a solid foundation existed that the conclusion was irrefutable. Mises, in developing his thesis, meticuously worked through each possible path of opposition and thereby did his best to develop logically consistent (truthful, absolute), irrefutable positions. In most cases he succeeded. Although difficult, the standard set by Mises would be one to emulate.
Anonymous Coward: For the four years combined the Federal Reserve collected $92.6 billion in interest on its portfolio of Treasury securities and other government bonds. The Fed also rebated $84.6 billion to the Treasury, which amounted to about 92.5% of its profits. From 1980-97 the Fed has collected about $329 billion in interest from the Treasury. It has also rebated about $327 billion during that period. It seems pretty clear that Federal Reserve profits really are returned to the Treasury. What this means is that Federal Reserve Notes do not cost the Treasury any net interest. ... This key detail essentially means that the bonds held by the Federal Reserve are interest-free loans to the federal government -- the equivalent of printing money.
Hm, fascinating. I wasn't aware the Fed gave "rebates" - not monetizing debt but monetizing interest...
Anonymous Coward: Now to look into this Jacques Jaikaran character.
I think the Jacques Jakaran guy is in the list of references since it was one of the primary sources for the myth that Flaherty was refuting... I've heard Jaikaran's argument a number of times before and it's pretty easy to see the hole in this. As mentioned in Myth 11 though, the fault in people's reasoning is that they treat the commercial banks as ethereal entities that don't need to buy stuff, and so the basic myth/argument assumes none of the interest paid to the bankers will ever go back into the system (by way of the banker paying his expenses).
A more interesting version of Planet Doom, which I've never read about anywhere but which it's unlikely I'm the first to mention (let's call it Planet Gloom), is one in which the banker does not spend all of the interest... In fact, he leaves as much outstanding as he possibly can so that he can maximize the amount of debt out there (by way of compounding interest) - effectively choosing to bleed his hapless victims for as little or as much as he likes... no doubt choosing somewhere on the limits of their starvation which will maximize his own personal gain, gradually confiscating more and more property (collatoral) from people defaulting on their loans In order to do this, he merely has to keep his personal consumption under the total amount of money required to pay back the interest on loans - in such a way he can ensure that the total amount of debt in existence is indeed always increasing exponentially, as per the original myth/conspiracy.
It's conceivable (unless there's also a hole in my reasoning about Planet Gloom that I haven't seen) that this is effectively what the central bank is doing in some economies - choosing only to buy the bare minimum in real assets and instead to buy mostly treasuries or repurchase agreements. When they do this they can bleed people for the absolute maximum and all of these "profits" that they're making magically go into the government's coffers, without having to have any official taxes at all (although if you didn't have other forms of tax people would start to wonder where the money was coming from and then the game would be up - so you've got to have some official taxes, even if for nothing else than to confuse people). When the economy shows signs of bursting, the bank can inject a bit of real cash by buying hard assets with hard cash - but once again, such a system amounts to little more than a bank run socialist state and so de Soto would no doubt express some reservations about the expected longevity of such economies.
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