Saving & Lending At The Zero Bound

Saving and lending at the zero bound is marked by two characteristics — rising savings but stagnant lending:

Loans vs Deposits since Lehman

This tallies with the data on savings as a percentage of GDP against base rates that I noted in April:

mises

The fact that the Fed has pushed large quantities of liquidity out into the system and kept interest rates at zero while failing to lift the systemic appetite for credit shows that the Fed can take the horse to water, but can’t make it drink.

Perhaps the weakness in credit appetite is symptomatic of the fact that there is so much pre-existing debt in the system that people and businesses are struggling to pay off?

US-Private-Debt-as-a-Percent-of-GDPIf that is the case then if the Fed would turn the monetary hose onto expunging debt — i.e. have a private debt jubilee — then monetary policy at the zero bound might become effective again in stimulating credit appetite.

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70 thoughts on “Saving & Lending At The Zero Bound

  1. Aziz – “If that is the case then if the Fed would turn the monetary hose onto expunging debt — i.e. have a private debt jubilee — then monetary policy at the zero bound might become effective again in stimulating credit appetite.”

    Ha, NO KIDDING! How about raising interest rates to reflect risk? Would any of this mess have occurred if rates had reflected risk all along? No! But of course we wouldn’t have had the boom, which made a lot of people filthy rich.

    So now, when people can’t even make it with the lowest rates in history, you want a debt jubilee as well? How sweet it is! Come on, Aziz, enough is enough already.

    We need to let people go under, banks go under. Instead of continually propping up assets, how about we try something different? Raise interest rates, which would cause asset prices to drop. This would allow young couples to eventually get back into the housing market at a fair price, and education costs to be affordable again. The elderly who rely on interest income could begin to spend again.

    No further bailouts or rewards for the people who caused this mess, please!

    • How about raising interest rates to reflect risk?

      Interest rates are a function of demand for saving and lending.The Fed is not the all-powerful creature it is often imagined to be. It can only work with the market that exists. It can’t force rates lower or higher than the market, at least not for long. If interest rates were being forced low, we’d see soaring inflation. We see the opposite. Core inflation is the lowest in history. You want to try and raise rates above where they are now? Okay — unemployment will go where it is in Spain and Greece, where the lack of a lender of last resort forced rates higher and unemployment higher. You want 25% unemployment? Is that going to punish the bankers, having a mass liquidation of employment and throwing regular people who are trying to work out of work? Yes, a severe liquidation could result in a natural debt jubilee, which is the solution we actually need but it would cause massive collateral damage to the economy. Don’t forget that the Nazis came to power after massive austerity and liquidation on promises to rebuild the collapsed economy!

      Nothing is a bigger reward for the people who caused the mess (bankers and rentiers) than raising interest rates and forcing prices to fall. Why? Because they derive a large part of their income from interest. And they’re sitting on massive piles of cash and will be able to buy up assets at lower prices. So even if there is a collapse and liquidation, they will win from the massive deflation and be able to buy assets very cheaply. The way to hurt the bankers and rentiers is a staged debt jubilee. They have society by the balls with massive private debt levels. Reduce the private debt levels and you free the people from debt bondage.

      • When you control the system as the bankers do, they profit any which way it goes. It’s like being a bookie, only much better, because the bookie takes his cut based on equal bets [for and against], but the banker profits long and short.

        A game rigged to this degree should be illegal, as it has been throughout history. One might believe that people would catch on to this scam of abstracting labor-value into money and credit and then stealing it in as many ways as there are Ivy League geniuses dedicating their lives to such a noble enterprise.

        Banking is theft, ALWAYS has been, ALWAYS will be.

        • A game rigged to this degree should be illegal, as it has been throughout history.

          Even when fractional banking or banking in general has been illegal it has not been prevented, it has just been driven to the edges of society (and banking in general has generally only been prohibited for Christians; non-Christians were permitted to bank, e.g.in the 12th century Aaron of Lincoln was one of the richest men in England — http://en.wikipedia.org/wiki/Aaron_of_Lincoln)

          I have never heard a serious proposal for a system that can prevent banking and fractional lending from taking place. Prohibitionism doesn’t tend to work. Didn’t work for booze, not working for dope, won’t work for fractional banking.

        • John, just because you can’t prevent something doesn’t mean it should be legal. For example, just because murder, rape, theft, etc., appears to be part of who we are as human beings, does that mean that we should legalize murder, rape, theft, etc.?

          We are so conditioned to thinking about economic life in terms of a system controlled by bankers, that people can not imagine a system free of these vermin. This, too, was true of most slaves and serfs, as they grew quite “content” with their lot in life [while seeking deliverance in the next world].

          Even the so-called smart people are shackled in this mind-set. Imagine a world where you de-institutionalized labor-value? It would mean the de-institutionalization of all parasitic groups, as THIS is EXACTLY what is needed. You, my friend, have written this many times.

          We stand at the precipice of change, peering over, too scared to make the leap, and yet, sick and tired of being attached to a system that has decayed into a horrific miasma of dys-functional institutions, groups whose leadership have traded their ethics for bloated assets and their hearts for a drug induced torpor.

          Certainly, Pink Floyd, had it right when they penned, “Comfortably Numb.”

        • I’ve got doubts about Aziz’s claim that banning fractional reserve will simply drive it underground. Banning money creation by the big banks and the larger shadow banks should be easy enough: though it would involve a fair amount of auditing. Plus this lot claim it is perfectly feasible:

          http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

          Obviously smaller and non-audited entities will try to get into the money creation business, but they’d have huge difficulties. I mean would you accept a cheque drawn on some unheard of shadow bank? As for credit and debit cards, those are dominated by large organisations and large banks. Plus its impossible to get a plastic card operation off the ground without the authorities noticing.

          Re Aziz’s reference to Aaron of Lincoln, that was a totally different world to the world we inhabit nowadays, and I don’t think Aaron’s success proves much.

  2. “I have never heard a serious proposal for a system that can prevent banking and fractional lending from taking place. Prohibitionism doesn’t tend to work. Didn’t work for booze, not working for dope, won’t work for fractional banking.”

    John, you are distracted. Th issue is not banking, instead, it is how do we steal their labor-value? Look at the systems that preceded so-called capitalism. What were these systems about? They were about stealing others labor value so some could sit on their asses and do nothing all day.

    All economic systems work the same way [how could it be any other way]. Why would you have a system if it wasn’t about those in charge of the system stealing from others. You must understand human nature to understand what human do.

    Banking is not about money or credit or any of these things, instead, it is about STEALING. THIS should be obvious to all by now.

    • Imagine a world where you de-institutionalized labor-value?

      You can’t force people to think about the world in that way. People want money up front, and they’re willing to sacrifice their future income as interest payments to pay for it.

      Obviously I am against exploitation, which is why banking should be regulated to prevent excessive usury and exploitation But people want to spend money they haven’t earned yet. This is essential to so many activities in the modern world — acquiring a house, acquiring a car, starting a business, etc. It’s just not going to go away by making it illegal. In fact, I think there’s a pretty good chance that banning it and driving it the unregulated fringes of society would advantage the money lenders, by allowing them to charge more.

      Stealing

      It’s not stealing if it’s consensual. If you agree to pay a percentage to a lender for access to credit now then that is not theft. Obviously it may turn out to not be a viable arrangement, but that is the risk the lender takes in lending. Sometimes on a systemic level a debt jubilee becomes necessary. I don’t think we should ever look at consensual activities like smoking dope, drinking booze and lending money as criminal.

      • Once you control labor-value, you control man. Look at what has gone on over the centuries in the name of everything but the Truth. The bankers control the world not because they control money/credit, it’s because they control labor-value, the source of all wealth.

        We live in a world where those who have this control preform horrendous acts of inhumanity, be it environmental destruction, outright warfare, resource stripping, and all the rest, so they can prolong a system that creates fabulous wealth for themselves and relative misery for the great majority.

        True economic freedom is having control of your own labor-value, the #1 reason all people came to America in the first place [for the opportunity].

        Not too many of those folks in the 18th and 19th centuries were concerned about bring forward 30 years of income so they could live way beyond their means while paying 3x’s as much in interest to a class that, as Thomas Jefferson so eloquently stated,

        “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”

        And, as far as stealing and consensual behavior is concerned, I will allow Henry Ford, who in 1932 quipped…

        “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

        …to make my case.

      • Fractional reserve equals stealing in the sense that assuming the economy is at capacity, and a commercial bank then lends money into existence, the effect is inflationary: i.e. purchasing power is stolen by the borrower from society at large. George Selgin actually wrote an article claiming that if commercial banks set up in an economy where there was only central bank money, commercial bank money would cause inflation of an amount and duration that reduced the monetary base to the minimum that commercial bank need to settle up between themselves:

        http://capitalismmagazine.com/2012/06/is-fractional-reserve-banking-inflationary/

        But this is a complicated issue, and I’m not suggesting I’m 100% right and you’re 100% wrong.

  3. Bernanke’s inflation target is just a cover for money creation (he could care less about the employment situation, but it sounds good to the masses, so he gets away with it). But you already know this, Aziz, and so do people like Krugman.

    Bernanke’s real goal is recapitalization of the banks….whatever it takes, the banks must be made whole lest the whole Ponzi scheme comes crashing down.

    With 75% of the American public living food stamps/paycheque to food stamps/paycheque, who is doing the saving? Who? They’re not saving and they’re not borrowing, so who is?

    Take a look at your Savings graph up above. Look how “Savings” took off from 2001 until now, about the time Greenspan flooded the system with cheap credit/easy money.

    “And SAVINGS isn’t just savings, but it’s also Money Market deposit accounts and the like.” Money market deposit accounts: can these so-called savings evaporate when the market goes down? Hmmmm.

    AND did these Money Market savings appear because the Fed is pumping billions into the banks, who then speculate with some of this money and force the stock market up?

    EASY MONEY – SOMETHING FOR NOTHING – I’m getting sick and tired of people trying to say it is anything but.

    And now a “debt jubilee” on top of the freebies? Well, that’d be like icing on top of the Ponzi cake. That would REALLY take care of all the banks’ worries. What, you don’t think that the banks’ debts wouldn’t be wiped out too, do you?

    It’s a win/win for everybody, except the ones who didn’t play the game. The “hustlers” take all and life is good.

    • Take a look at your Savings graph up above. Look how “Savings” took off from 2001 until now, about the time Greenspan flooded the system with cheap credit/easy money.

      There’s pretty considerable evidence that Greenspan’s monetary policy was far tighter than the market wanted, and far tighter than the historical norm (look at M2/GDP for example). That’s why shadow banking came into existence! To create money when and where the Fed and traditional banks wouldn’t.

      And now a “debt jubilee” on top of the freebies? Well, that’d be like icing on top of the Ponzi cake. That would REALLY take care of all the banks’ worries. What, you don’t think that the banks’ debts wouldn’t be wiped out too, do you?

      The kind of debt jubilee I am advocating would only extinguish (a part of) individuals’ debts.

      But for what it’s worth, banks (quite obviously if you think about what a bank does — borrows short and lends long) have a lot more loans made on their balance sheets than loans received. That’s how they make money Otherwise, they wouldn’t be banks! And that’s why a debt jubilee of any kind would not only help the indebted masses, but also massively reduced the power of the banks.

      I couldn’t care less about whether the monetary system is “tight” or “loose”. I care about whether the real economy is functioning and growing. The evidence suggests that the lending stagnation is hurting the real economy (employment, home ownership, technology, growth, etc) and a partial debt jubilee is the easiest way to break the lending freeze. Forget the masochism and the self-punishment.

      • You sound like my relative who doesn’t care how the money is gotten, but “just get me my next fix”. She’s not into masochism and self-punishment (that would entail looking in the mirror and facing herself); she just wants her next fix. It doesn’t matter whether she has to steal from the people who love her; she just wants her next fix, and will do anything to get it.

        So everyone has bailed her out (and out and out and out). They say it’s to get her over the rough patches, yet I think it’s probably, in all honesty, their way of denying the situation and pushing it under the rug for awhile, just so they don’t have to deal with it. That way life goes on and everybody gets back to what THEY want. I mean, how the hell do you put on your make-up and go to the mall when someone is nagging at you for money or stealing your stuff while you’re out? Besides, withdrawal can be so messy and takes up so much time, and might force you to look at YOURSELF as well.

        If I was playing the markets, and if I was of a certain mind, riding the cheap money that’s pushing the markets up, I’d sure as hell want everybody to just shut the hell up, be bailed out, stimulated, jubileed, whatever, anything to get my next fix (money). I wouldn’t care whether a system was “tight” or “loose” either, just like the addict doesn’t care how they get their money or how they have to sell their souls to get it.

        Hustlers and addicts (and the people who aid and abet them) never make families or countries. That’s why we don’t have them anymore.

        And as impermanence says, “When you control the system as the bankers do, they profit any which way it goes.” The bankers are the pushers in the system. And as long as the addicts profit from the pusher, and the politicians and president (who make the laws) continue to profit, all is well in pusher-land.

        “The Pusher” by Steppenwolf:

  4. “The evidence suggests that the lending stagnation is hurting the real economy (employment, home ownership, technology, growth, etc) and a partial debt jubilee is the easiest way to break the lending freeze.”

    A partial debt jubilee will simply prolong this current system. This is not what we want.

    This would be like having the 600 pound man, who heart is about to explode, lose a hundred pounds so he can start to binge again.

    This system is 100% burnt toast and must be discarded one way or another.

    • We’re not talking about medicine and obesity. We’re talking about debt. But to use your analogy if you can “write off” the fat, we should do that down to a healthy level so that the economy can grow again and create jobs.

      • Why not use this opportunity to move forward? Do we need to burden succeeding generations with the same non-sense?

        And whereas you are correct that medicine is not debt, human nature fails to recognize this difference.

        But don’t get me wrong, John, as I am all for a debt jubilee, but only if most of the financial sector vanishes, as well.

        • I just greatly doubt that it’s possible to get rid of banking.

          I magine a world where savers get zero yields all the time! And imagine a world where people can’t borrow to consume future income. Many, many people would get very, very angry about that kind of shift.

        • Sorry – “Totally agree with this thinking, especially your last sentence” refers to impermanence’s post.

        • “I just greatly doubt that it’s possible to get rid of banking.”

          Maybe, maybe not, but sometimes you must lead with your heart, not with your head.

          “Imagine a world where savers get zero yields all the time!”

          Well, what is yield? Is it not the future expectation of price? In a sound money environment, where there is no inflation [only natural deflation due to increases in productivity (shared by all)], what would be the purpose of yield?

  5. impermanence – good common sense posts, all.

    Aziz – “Core inflation is the lowest in history.” If you believe the manipulated statistics. I’m feeding hungry mouths, and I don’t buy it at all. Cheap money is pushing everything up!

    “You want 25% unemployment? Is that going to punish the bankers, having a mass liquidation of employment and throwing regular people who are trying to work out of work? Yes, a severe liquidation could result in a natural debt jubilee, which is the solution we actually need but it would cause massive collateral damage to the economy.”

    If it takes 25% unemployment for people to stand up and start paying attention to what’s going on with the bankers and their government, then, yeah,I say bring it on. Let them feel what globalization has done, feel it in their gut, let them taste monopolization, cartels, corruption. Just like impermanence’s 600 pound man example, people don’t need any more bailing out. Bailing out just covers up the problem. They need to realize you don’t get something for nothing. Keeping your weight or finances in line is hard work, but that’s just it, it’s work. To bail them out is to kill any real life they might eventually have.

    Bernanke’s devaluation of the currency is a complete travesty. So a man doesn’t ask for any handouts, works hard his whole life (sometimes two jobs), saves for his retirement so he won’t be a burden on anyone, and what does he get for that? The $80,000.00 he saved over and above his pension (which used to be a lot of money) gets him what now – diddly-squat. Talk to that man.

    Inflation has literally stolen his labor-value. Thanks for working so hard, buddy, paying taxes, but now we’re going to have to STEAL that from you.

    • If it takes 25% unemployment for people to stand up and start paying attention to what’s going on with the bankers and their government, then, yeah,I say bring it on. Let them feel what globalization has done, feel it in their gut, let them taste monopolization, cartels, corruption.

      Presenting, the reason why 25% unemployment should be feared:

      Mass unemployment turns people onto the voices of extremists like the Nazis, like Mussolini, in England like the BNP and the EDL. This has proven to be massively destructive in the past.

      So a man doesn’t ask for any handouts, works hard his whole life (sometimes two jobs), saves for his retirement so he won’t be a burden on anyone, and what does he get for that? The $80,000.00 he saved over and above his pension (which used to be a lot of money) gets him what now – diddly-squat. Talk to that man.

      Why should the economy be run for the benefit of mollycoddling savers? Savers in a paper currency are ultimately gamblers. If the economy needs jobs and growth, people who choose to save in a paper fiat currency must take the consequences of their actions and accept some devaluation. That is life. If you want gold that can’t be printed buy gold.

      For what it’s worth, I don’t think that printing money is very effective at lifting jobs and growth (direct government spending is much more effective, as Keynes argued), but anyone who knows anything about monetary policy in the modern age should know that central banks will try it.

      • Aziz – “Why should the economy be run for the benefit of mollycoddling savers? Savers in a paper currency are ultimately gamblers. If the economy needs jobs and growth, people who choose to save in a paper fiat currency must take the consequences of their actions and accept some devaluation. That is life. If you want gold that can’t be printed buy gold.”

        See the post below entitled “One Dollar of Capital”. Nobody is asking to be mollycoddled. That guy that I mentioned above, that useless saver who has looked after himself and hasn’t asked for anything, who raised his kids and put them through college, who worked hard – he also risked his life by signing up to fight against those nasty Nazis you’re so worried about. If you want to talk about risk, well, that’s the ultimate one. He comes back in one piece, is encouraged to save and not be a burden (so he’s careful not to be) and now you insult him by saying he expects to be mollycoddled?

        But it appears to be okay to mollycoddle the people who caused this crisis? Bail them out, jubilee them? Who are the people who are really being mollycoddled? And for whose benefit? Why? So the machine can be cranked up again? I thought so.

        I’m sure the old-timer doesn’t care whether he gets any interest on his savings; just don’t rob him by devaluing the currency (causing the money he worked hard for to be deflated) and causing inflation. If anyone – anyone – is to benefit, it surely ought to be the ones who didn’t create this mess.

        Shall we reward the rotten apple and throw the good one under the bus? I wonder who benefits in that situation.

        • Shall we reward the rotten apple and throw the good one under the bus? I wonder who benefits in that situation.

          It’s very sad (and mad!) that this is what this comes down to, the idea that debtors and non-savers need to be punished and bludgeoned and that savers should be rewarded — even to the extent that the government should do nothing if unemployment rises and the economy becomes depressed due to fear of “debasing the currency.”

          When the economy is depressed and (as the data shows) people who are afraid are all trying to save en mass, more savings do what? Take money out of the economy. That doesn’t create jobs or growth. What does? Economic activity, buying, selling, investing — that creates jobs and growth. Inflation is an incentive for people sitting on cash to act and create some jobs. Personally, I am not very convinced that central banks really have much power to generate inflation in a depressed economy, but if they can then they will and that is a risk of sitting on a pile of cash.

          Again, if people want to just sit on cash and do nothing with it, then there is always a lump of gold. Everyone else should understand that money is elastic, and if there is a problem with unemployment, more will be printed. Not only is sitting on a pile of cash not socially useful, but it is very ignorant of the economics of paper currency. It is not “doing the right thing”. And asking that savers be protected is just asking that those who are already rich be protected and the poor and unemployed who don’t have jobs and savings — and who didn’t cause the crisis — be thrown under the bus.

      • Remember Democracy in Germany in the 30’s was relatively new, and the unemployed people realised they needed a leader to break through the political gridlock. If you read Men Kampf you will see the section where Hitler had disdain for the democratic process and ridiculed the politicians and the press. It is very similar to today’s situation. Business won’t invest unless there is stable policy. Even if that policy was a war economy.

        With the rise of the Nazi Party, Keynesian theory was implemented very quickly. Fiscal policy had failed with Weimar Hyperinflation.

        Germany was studied quite closely for its economic miracle.

        As I have mentioned in other posts, the Bernanke QE policy was there to provide emergency liquidity and Bernanke has expressed that it is the Governments job now.

        If only Obama spent more money back in 2008 on key infrastructure and less on Obama Care legislative change. He dropped the economic ball. I knew back when they had their Budget speech that they missed a good opportunity. Now they are deeper in debt, with no tangible infrastrucure or R&D to provide global competitive advantage.

  6. The issue always has been the FISCAL situation. The Central Banks greased the spigot, but the monkeys handling the spigot have no idea which way to turn it. Rampant Keynesian policy with no regard to the business cycle, and MMT Central banker meddling has caused untold damage to the economy. What we are seeing now is atrophy.

    It is time to wake up and clean out the system.

    Who in their right mind would borrow and lend in this environment?

    • The central banks set up the boom with cheap credit for too long a period (gee, that was a surprise!), most economists kept their mouths shut, Wall Street banks sold worthless securities and made a killing, regulators watched porn, rating agencies apparently only owned stamps with “AAA” printed on them, governments and politicians smiled, shook hands,and everybody pretended they didn’t know what was going on (too busy profiting, I guess).

      Now they’re bent on eliminating the bust cycle through unlimited deficit spending and bailouts – and now, out of fear the party might be coming to an end, we hear talk of debt jubilees in order to get it geared back up again.

      Of course, the pawns (the people with no money, but who borrow heavily) are used on the way up (oh, we can’t deny them a house) and used on the way down (gee, let’s alleviate these poor folks’ debt). Like they could give a sh*t what really happened to these people!

      We can’t let anyone fail because apparently there would be chaos, the whole world would fall apart, or, a Krugman-type argument, the Nazis will return.

      The way I see it, if you don’t want people to start listening to dangerous dictators, don’t set up the conditions for it in the first place. Because for anything to come into existence, conditions must be favorable. Perhaps TPTB should have thought about that beforehand.

      • I agree with your comments, my comment was in relation to the wheels falling off the economy, and Bernanke trying his best to prevent systemic collapse and buy time. The credit and capital markets recovered sufficiently to prevent panic, deflation and business investment collapse. Obama was newly appointed with an opportunity to set the economic agenda. Nat Gas from fracking was just being touted as a world saviour energy supply, and Obama could have announced infrastructure spending to leverage this. Instead ad hoc peacemeal fiscal pork barreling was touted, which may have been lovely for political purposes in the respective electorates, but not sufficient to reinvigorate the economy and give business a reason to coinvest.

        A Third Reich style economic solution was required. I am not supporting the Third Reich Germany, but the massive public/private infrastructure directives of the 30’s that got Germany out of high unemployment and poor business confidence of the time.

        In this respect Bernanke was not given enough credit, and he should bite the hand that fed him, by denouncing Obamas administration for ruining his future reputation. The medicine was taken at too low a dose and too sporadically to be affective. But the bill is the same.

    • “Who in their right mind would borrow and lend in this environment?”

      People who can off-load risk and those without any savings. This system is about the creation of dependency and the outsourcing of risk.

      Privatize profits, socialize losses. It’s the same game it’s always been, organized, albeit, quite legal, crime.

      Look at the world!! These is theft EVERYWHERE.

  7. “One Dollar of Capital” by Karl Denninger may go to solving our problems:

    “One Dollar of Capital is simply the principle that nobody be permitted to “create credit out of thin air”, thus artificially expanding the spendable supply of “money” in the system. This, and only this, is the reason for all of the bubbles and financial collapses throughout history. This sleight-of-hand is why Tulip Mania happened, it’s why we had a crash in 1873, it’s why we had a crash in 1929, it is why the tech market blew up in 2000 and it’s why we had a crash in 2008 in housing. It is why we’re threatened with collapse in Europe now. It is a scam as old as the money changers during the time of Hammurabi, and until we stop it there will never be stability in the banking and financial system. This sleight-of-hand is in fact exactly identical in mathematical and economic impact to counterfeiting of the nation’s currency, a crime which we all should recognize, condemn, and when it occurs the punishment should include both imprisonment and forfeiture of every dollar of ill-gotten gain.

    Putting a stop to unbridled credit creation also removes the threat of “inflation” because it makes inflation by sleight-of-hand flatly impossible. It returns the ability to cause inflation to the one place where it should rest — the entity that is supposed to be in control of the money supply, the federal government (specifically, Congress.) We have in fact had monstrous inflation over the last 30 years; one need only look at the increase in the price of stocks, of college educations and medical services to see it. The bankers and their cronies have tried to hide its impact on the common man through offshoring of labor so as to hold down “prices” in the CPI, but that’s a lie too as a man who loses his high-paying job to some slave in China has his spendable income destroyed at the same time as he gets “lower prices” at WalMart.

    Simply put, for every dollar of alleged GDP there must be one of dollar of credit or currency with which to buy the goods and services produced. If you increase the denominator, that is, the number of units of either credit or currency in the system, then each unit must inevitably be worth less than it was before. Only when those units are exactly in balance with economic output is there zero inflation and protection of the currency’s purchasing power.”

    http://market-ticker.org/akcs-www?singlepost=2996132

    • “One Dollar of Capital is simply the principle that nobody be permitted to “create credit out of thin air”, thus artificially expanding the spendable supply of “money” in the system.

      Absurd nonsense. Endogenous credit creation has happened in every modern economic system known to man. Even where fractional reserve banking is banned, promissory notes and certificates of deposit and other shadow instruments come to play the role of money. How does Denninger suggest we get rid of endogenous credit creation? Ban it? Then it will go to the fringes of society, like drugs, booze during the prohibition era where it is totally unregulated. If you think banking is bad now, ban credit creation and see how bad banking becomes. Banning endogenous credit creation is like trying to ban alcohol. Or sugar.

      Furthermore, while credit expansion and contraction does accompany booms and busts, I don’t think there is sufficient evidence to say whether the chicken comes from the egg or vice versa. Personally, I think booms and busts are a matter of psychology. Animal spirits. You can’t just ban that.

      • If you must have money, then money should be created coincidentally, and only as a result of, labor-value preformed. You can’t have money first, as this notion should raise a parade ground of red flags.

        This is what banks do, they create money first, and it is this process that give life to the opportunity for all kinds of mischief. As an example, is it better to pay your contractor up-front for his services, or is it better to pay as he preforms the work?

        Same idea.

  8. Hi Aziz,
    Near zero interest rates is only for the rich, the rest of us private and business are still paying high rates of interest, now if small businesses even those with 1 or 2 employees could borrow at 0.5% then jobs would be created as they would be able to afford to borrow and invest, well one can dream

    • now if small businesses even those with 1 or 2 employees could borrow at 0.5% then jobs would be created as they would be able to afford to borrow and invest

      I completely agree. Using the banks as a transmission mechanism for lending is a complete disaster.

  9. Great Posts by everyone. Some thoughts. In Greece right now indeed we have 27% unemployement with 60% under 25 years old unemployment.

    To commend impermanence’s point, yes the greek people on th whole have a very clear understanding that the politicians, super rich and banks are now controlling everything. They would love to see the abolishment of this corrupt system, but there is realistically no real proposal being made. Okay nice thoughts but nobody at the top wants to change any system because they are part of the system. So as my countrymen understand the system will not break. They know this and it will not come from Greece, Argentina or Brazil. Meanwhile, John’s point of the Nazi’s coming to power while unemployment rised. The right wing party of Greece “Golden Dawn” or Neo Nazi’s have 15% of the vote. not because people sympathize with their “political agenda” but because they have nobody to vote for and will cast there vote for someone who “will literaly kick the asses of the past corrupt politicians.”

    The Greek people are already adjusting though and are simply waiting. But not numb. Actually the 27% unemployment is not a real figure. I would say that it is more of 12-15% because many of these people are working “off the books.” Unfortunately, this is also part of the “leaders” agenda.

    On the lighter side, i see alot of growth of business in greece and exports over imports is on the rise. It will help with unemployment but not much. This is because many people prefer to stay off the books and pocket what they make as a true label-value than to actually pay taxes, insurance which in truth goes to pay bank loans we are forced to take.

    I see this debt jubilee starting when the system has taken that which it could take out of the people and change the rules. I see in a year the greek success story and the eu successful comeback being raged in the media. Then the shackles will be lossend only to break us completely in 10 years again…..

    • Fascists usually gain power because like you said the population needs someone to kick the arses of tke Kleptocrats, the ones who join Parties to partake in theft not to partake in Nation building.

      However, Fascist Parties need benefactors. No matter how idealistic one is, if you do not have the initial capital, you can not create a Political party on your own. Hitler wrote in Mein Kampf that he was tortured idealistically in making the decision to join the Nazi Party. this meant he compromised some personal values for the values of his ultimate benefactors.

      I assume the leadership of Golden Dawn has some very powerful benefactors. It is almost as if the Kleptocrats are turning on themselves.

  10. “They would love to see the abolishment of this corrupt system, but there is realistically no real proposal being made.”

    Now we are getting to the heart of the matter.

    The truth of the matter is out there, proposals all over the place, but few care to listen, for as many reasons as there are people who wish to continue their attachments to things already past.

  11. Aziz: “Imagine a world where savers get zero yields all the time!”

    impermanence: “Well, what is yield? Is it not the future expectation of price? In a sound money environment, where there is no inflation [only natural deflation due to increases in productivity (shared by all)], what would be the purpose of yield?”

    Exactly, impermanence. If not for inflation, nobody would care whether they got yield or not. Thank you for putting it so well.

    • If not for inflation, nobody would care whether they got yield or not. Thank you for putting it so well.

      Which is why usury didn’t exist when we were on an inelastic money supply (the gold standard). Oh wait. Usury and the desire for interest did exist then! Oh wait. We currently have some of the lowest interest in history on elastic money!

      Throughout history, people with capital have charged for access to capital (lending). That’s just the way life has been.

      • Read “Economic Analysis in Talmudic Literature” by Roman A Ohrenstein and Barry L/J. Gordon

        It gives Talmudic argument for lending at interest.

        “Likewise, Irving Fisher in his Theory of Interest argues that the determination of the rate of interest is influenced by the psychological forces of time preference” … “Thus, the distinguished Jewish Philosopher, Abraham Joshua Heshel, notes that the teaching of Judaism has emphasised time rather than space, the idea of space is about the cosmos and its natural phenomena. Whereas the notion of time as presented in the Hebrew Bible is about a record of happenings in history. In reference to Biblical wisdom Heschel says “…shifted from space to time, from real of nature to the realm of history, the emphasis of time is a predominant feature of prophetic thinking”

        Expectatin deferred maketh the heart sick; but desire filled is a tree of life (Prov. 13:12)

        …remember that death does not tarry, nor have you been told the grave’s appointed time…deprive not yourself of present good things, let no choice portion escape you (Ecclus. 14:12-14)

        ….The Torah (Ex.22:24,Lev. 25:35-38 and Deut 23:20-21 prohibits the lending of money, any commodity or produce for interest….”

        The Talmudic scholars looked ways to interpret the scriptures, which eventually allowed lending with interest. The main one being the service provided to the borrower and the reward for lost access to time preference to the Lender. The Book is a very interesting read.

        So Capitalist Bankers understand the nature of man, who desires things now, and must pay a token of gratitude to those who defer their desires.

        Interest is a necessary service. It can not be outlawed.

  12. “So Capitalist Bankers understand the nature of man, who desires things now, and must pay a token of gratitude to those who defer their desires.”

    BR, what a great post!!

    The Capitalist bankers understand the desires of man, not the true nature of man. Imagine what the world would be like if people lived only through their desires. This is the basis of all morality [and philosophy, for that matter].

    But, lets filter out these pesky social mores and concentrate only on the practical matter, that is, what happens when a society is subject to usury?

    If it is only meeting desires that motivates the need to bring future income forward [at interest], then why not apply to reasoning to all things? If we can mortgage our financial futures [labor-value earned] to a class of people who provide nothing but capital [and provide that out of thin air], why not mortgage other items of desire? For example:

    1. How about allowing all teenage boys to have as much sex as they possible can when they are able, indebting them similarly?

    2. How about having young women spend an unlimited amount of money shopping and then having them pay back this…well, wait a minute, they already do this!

    3. How about placing the entire youth of the so-called 1st world in massive debt by extorting them for their worthless college…well, they’ve done this too.

    4. How about using housing as a giant scam to foster all kinds of financial weapons of mass destruction…check… .

    Well, BR, other than number one, which should go over pretty big, I believe your idea that, “interest is a necessary service,” is fallacious.

    That’s what happens when you spend so much time standing upside-down. :)

    Certainly, a CPA of your intelligence can imagine a world without interest, of people truly living within their means, of commodities priced much closer to the cost of production, what every classical economist saw as man’s salvation and deliverance from the parasitic classes who wish only to take what is yours’ and make it theirs’ through the magic of finance, politics, and twisting intellectual reality.

    Bankers are the lowest form of life on this planet. As a matter of fact, I saw a group of bankers the other day consulting a gathering of like-vermin [maggots] on how they [bankers] can raise their reputation in the community.

    • LOL Imp. My dear friend, I said it gives “a Talmudic perspective”.

      Even Edmund Bourke had reservations about paper money introduced during the French Revolution, because interest on fractional reserve produced money is something from nothing. Print money and charge someone their labour value, because they have to borrow to buy a house, because the price of houses is rising faster than they can save.

  13. “We are now collectively in worse shape than we were in 2008 because we have issued trillions of additional credit into the system for which there is no matching production.

    Exponents are a bitch. The longer you wait to deal with any problem that has a compound factor (that is, “X% per year”) the worse it gets and the damage increase is not linear it becomes exponentially worse over time. A 10% fiscal deficit that is “counteracted” with something like QE (which is what we’ve run, more or less, since 2007) doubles in 7 years — not 10 — and then it doubles again in another 7. In 21 years it is not three times the original problem’s size it’s eight times larger!

    We’ve already doubled down — and doubled — the pain we needed to take in 2007. It will be four times as bad, and we will not survive it as a nation or society, if we let this go on for another seven years.

    Those who ran this crap ought to have long since been indicted, tried and imprisoned. If it is not stopped it is merely a matter of time before people are calling for the gallows rather than the penitentiary.”

    http://market-ticker.org/akcs-www?post=222107

  14. “If it is not stopped it is merely a matter of time before people are calling for the gallows rather than the penitentiary.”

    backwardsevolution…
    Don’t take it personally, but people haven’t even called for it to stop yet. Instead, there are two basic factions, those who are still profiting off of the dys-function, that is, the 1%, and those who are wards of the state [receiving welfare [transfer] payments of whatever sort.

    If you allow yourself to get caught-up in the collateral damage, then you too, will suffer as a result. The alternative is to simplify, make yourself as independent as is possible by REDUCING your needs, and especially by GETTING OUT OF DEBT. This way you can see things more clearly as we all navigate our way through the coming storms.

    The good news is that on the other side of the tempest, lies calm waters, and there will be healing, and man will plod forward with renewed energy and spirit.

    • impermanence – not taken personally, and thanks for the advice. I have always been extremely independent, already live simply, with no debt. Although I have at times lived in luxury, it was not for me. It takes too much time to do that, to do it well, and it always took me away from what I really loved – thinking, making connections.

      One reason why I resent the time spent on the games being played by the 1%. Just think of the discoveries that could be made if we placed value on what is truly important instead of always trying to one-up the next guy, if we really understood and felt the meaning behind the words “for every winner there is a loser”.

      • Think as though we are the ILLUMINATI 2.0 and the Politicians as kleptocrats who once worked in the shadows, protected by complicit media owned by a few oligarchs, but now are exposed for the cockroaches that they are, due to the internet and the gathering of like minds who bounce ideas and concepts of each other, honing the arguments required to sway the mass of voters who weild ultimate power at the ballot box. Unless we have a situation like Egypt where the military intervenes, because they fear the US funding cut, then I have hope for the future.

  15. When I first initiated my search for the truth [several decades ago] and poured myself into the study of the usual subject-matter [history, economics, finance, politics, philosophy, religion, etc.], I was stunned at how those in different eras in history knew EXACTLY what was going on [as we do today], that things did happen not by some random mistake, but instead, because it’s EXACTLY how they are designed to work, and that the few end up with everything because this is human society has ALWAYS worked.

    Fighting against human nature is not so easy, humbling the strongest among us, but expecting a near-democratic society run by benevolent men and women is not going to happen…ever. Human nature has NEVER changed, so the best we can hope for is to attenuate the power of the institutions that human beings use to exploit others.

    Even at the time that the American Founding Fathers gave mankind the hope of creating a better society, they, themselves, participated in one which was anything but, but these men understood the limitations, and this was the key in the writing the U.S. Constitution, perhaps the greatest of all social contracts man has penned [thus far]. It’s profound truth is manifest in it’s simplicity.

    People need to understand that, The State, and, The Corporation, are merely intellectual constructs as illusory as were the institutions of slavery and feudalism, that is, they are born, have life, and die, like all things knowable.

    As individuals, we can live outside of this to a great degree just as those in the middle ages began to see the light that existed outside of The Church’s rule, allowing people to seek a better life in the here and now, as opposed to purchasing a future one on the installment plan.

    In other words, and in the spirit of those who gave us this great country, what is going on now will not last, and when these vermin are placed under whatever pile off shit they deserve, I believe an new America will be re-born and people will once again discover that freedom can only be manifest through individual efforts, that the enemy of people everywhere is, The Group, in whatever hideous form it presents.

    Happy Forth of July to all Americans and a special thank you to the Brits who laid all the groundwork!!

  16. impermanence – we won’t change the financial system until we change the political system, and we won’t change the political system until we change ourselves (our thinking), and we won’t change our thinking until we start to feel some real heat and suffering. Suffering is a funny thing – if you don’t try to stop it, dismiss it, fix it, cast the blame elsewhere, it is the greatest teacher. People do anything to avoid suffering (the elite know this), and yet they really miss out on the greatest gifts – independence, freedom, and, most of all, wisdom.

    I think what Karl Denninger is saying is that, although people are not calling for change, the math is going to bring them kicking and screaming to change.

    “…because it’s EXACTLY how they are designed to work, and that the few end up with everything because this is [how] human society has ALWAYS worked.” Yes, you are correct in that. They are like viruses or parasites in nature; they need to run their course.

    “…freedom can only be manifest through individual efforts…” Conditions must be favorable for disease. We have allowed favorable conditions for the 1%; we have not been paying attention.

    “Its profound truth is manifest in its simplicity.” I too am an admirer of your Constitution. All great things are simple. They must be; truth never needs “more”.

    Americans, happy 4th!

    • Agreed. Let us hope that people find the time to Google “Declaration of Independence” “US Constitution” “Founding Fathers” because Kim Kardashian tweets “OMG I just found out what the Declaration of Independence was about”.

      It was a powerful document, but unfortunately the Judges who are trusted with interpreting the “spirit” of the Constitution, have taken upon themselves to be worthy of interpreting it as a “fluid” document. From my impartial interpretation it was designed to limit the innate flaws in man, that never change. Unfortunately the Left has appointed Judges, and allowed poverty to flourish, which plays into their agenda of usurping the Constitution and implementing a form of Socialism that will suffocate the spirit of the USA, just as it did in the Soviet Union. Only the elite benefited from Socialism. The Left needs down trodden masses to justify their existence.

  17. Debt jubilee, what a great idea. The day it becomes clear this is whats gonna happen I will borrow as much as I can, buy up as much stuff as I can and then have my debts wiped. Love it.

    There are Bill and Bob, both checking out a property for sale.

    Bill, even though he had little capital to start with and had a feeling that real estate is over prized goes all in and buys the house. Massive mortgage but who cares, interest rates are low and one has to keep up with the Jones’ after all.

    Bob on the other hand, realizing the house price is ridiculous consequently didn’t take out a heavy mortgage and kept on paying rent instead.

    And now comes Aziz’s debt jubilee, making sure that irresponsible Bill ends up with a nice house, while prudent Bob gets nothing. Fine recipe.

    The lesson Bill learns from this experience will be much different to Bob’s.

    • Your views on responsibility and morality and whether things are overpriced are your opinions. They’re not facts. We shouldn’t put unemployed people on an altar and sacrifice them to whether you and Ludwig von Mises think that housing is overpriced.

      Also with a debt jubilee you don’t wipe out the whole debt in one go. You only wipe out a small portion to begin with. If someone with a low income took on a huge mortgage it would still be unsustainable even if 1% of it is is forgiven.

      Also, I haven’t heard a debt jubilee proposal that doesn’t compensate people who have no debts with an equal amount of money… So, err…..

      • Aziz, you wrote

        “Your views on responsibility and morality and whether things are overpriced are your opinions. They’re not facts.”

        Man, in the world where I live, when someone gets into debt to the point that even at near zero interest he/she have trouble paying the dues and needs debts to be forgiven so as to be able to spend again on other items, we call that irresponsible, if not outright stupid.

        If I understand you right this idea of reducing peoples debts is designed to give them room to increase their debts again? Hmm, sounds like something from a Dr. Seuss story.

        “Also, I haven’t heard a debt jubilee proposal that doesn’t compensate people who have no debts with an equal amount of money”

        Sorry Aziz, I indeed should have asked first how you foresee this jubilee to play out before assuming your plan would somehow favor the debtors. Would you please outline how such a debt forgiveness program would look? How is the amount calculated Bob would receive in my above scenario?

        • Simplest way is that every individual gets a cheque for a few thousand dollars from the central bank. I prefer this way, because it is simpler and because it doesn’t force anyone to do anything, but increases systemic liquidity without messing around with Rube Goldberg-style quantitative easing transmission mechanisms. Obviously this wouldn’t ensure that the money goes to reducing debt, but with liabilities throughout the system so high, it almost certainly would.

          If we have to ensure the money goes to paying down debt, then the central bank prints enough new money to write down a certain amount (say a few thousand dollars or pounds) of each individual’s debt. People then apply to receive it, either by informing the central bank of which creditor they want to pay, or sending proof they are debt free (credit card statements, bank balance) to which they would receive their cheque.

          Obviously, if this method does not reduce unemployment sufficiently, then it can be repeated so long as inflation stays low.

        • Lets say the government prints up $5’000 for everybody, that would be in the USA approx 3oo million people x 5k, equals 1.5 trillion dollars. Lets say half of that it is used by debtors to repay debts, leaving about $750 billion extra cash sloshing around.

          Now, what will the effect be?

          For people with hundreds of thousands in mortgage debt a $5’000 check isn’t gonna make a meaningful difference, their consumer spending isn’t gonna increase cos they now owe $495’000 instead of $500’000.

          Those people who only had a couple of credit cards maxed out at $10’000 will pay them down to $5’000, and having learned nothing else than hey, free money for all when push come to shove, will happily spend their way back to a maxed out card. Even though this might give a jolt to the economy, it would be short lived and only get us back to where we were.

          What then? Another debt jubilee?

        • What then? Another debt jubilee?

          If inflation stays low or moderate then another partial debt jubilee is possible. If it rises, then not only is it unfeasible, then it is probably unnecessary as inflation devalues past debts as a percentage of national income.

    • Agreed. I say people should only get back their taxes they paid, and then the Government has to spend less in the future, but the injection of cash from Consumers unleashes all types of animal spirits. A Debt Jubilee is moral hazard at its finest.

  18. Senor moment…
    You’ve already [and continue to have] a debt jubilee for the financial sector and those who are being subsidized with ZIRP. This needs to be extended to all people. When you get yourself into a situation similar to one we now enjoy, you need to destroy debt any which way you can.

    If a patient shows up in the ER with a [fill in the blank], do you sit around and moralize about how it happened, or do you treat the patient?

    • If a patient shows up in the ER with a [fill in the blank], do you sit around and moralize about how it happened, or do you treat the patient?

      Excellent point.

    • The fact that banks are given interest free money to park at the Fed and earn a spread, does not lead me to the conclusion that this scheme should be extended to all people, quite contrary, the banks also shouldn’t get funds for free.

      Why can’t we have the old days back where if someone overextended themselves with debts he goes bankrupt and the lender takes the loss. This process also destroys debt, the natural way.

      Regarding your ER analogy, depends for what reason the patient shows up. Should he have a heroin (easy credit) dependency and shows withdrawal symptoms, I would not treat him with another dose of heroin. Treating a patient does not necessarily mean giving him what he screams for.

      • Having worked in Finance, and seen the Credit approval first hand, the problem started with new finance companies getting very cheap credit from god knows where (Suspicion is Central Bank in US) and my bank losing market share because of the conservative Credit Manager rejecting applications. After pressure from the Credit Analysts, the CEO started to put pressure to force the Credit Manager to accept proposals.

        This was in the early 2000’s and the world is in a mess because liquidity flooded the world, and people bought on credit. Now the Boom has Bust and we need to learn from it.

        Sales type personalities put pressure on Conservative types, and the result is like in life, accidents happen.

  19. Pingback: Permanent Employment Stagnation? | azizonomics

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