Tuesday, November 18, 2008

What has changed is the consumer

Thinking back on things that have changed recently, in terms of context for the economy, I believe the consumer to have changed.

This is an economy lead by consumer spending. Clearly the consumer was spending more than he brought in and took on debt burden that would tap out eventually. But I don't think we are seeing just a slight re-adjustment to kill overlever (which would be a -3% variation in consumption).

The read downside to consumption may be the consumer re-aligning his priorities. For example it is clear to me that while the price of oil has been all over the place, it has awaken fears of inflation and oil dependency that I think will trigger behavioral changes as powerful as what we have seen with 911.

It is Chic, already in Iceland, to dress like you are feeling the pinch. Makes me think of Zoolander and the expo of "Derelict".


Bill Pyne said...

"It is Chic, already in Iceland, to dress like you are feeling the pinch."

And how much are retailers charging for "proletariat" wear?

Marcf said...


pcleddy said...

First, fractional reserve banking rules require that the FED maintain a
certain percentage of their loans in actual physical currency, like cash
or government securities. In other words, they are allowed to loan their
member banks money based on the amount of physical reserves they have.
Another way of saying this is that the amount of money their member banks
are allowed to loan out to you and I is based on how much physical
currency the FED has in reserve, meaning inside the vaults of their 12
"Reserve Banks." So the question becomes, "how does the FED increase its

The FED increases its reserves (the actual hard currency stored in their
vaults), by "purchasing" government securities. (I put the word
"purchasing" in quotes for a reason, which I will get to in a moment.)
Since the FED's reserves are now larger, they can loan more money to the
member banks, who in turn loan money to individuals, businesses, other
banks, etc. The multiplier effect then kicks in, which creates new money,
because say I take out a $10,000 loan to buy a car. The car dealership
takes my check and deposits it into another bank. That bank then increases
it's own reserves by $10,000, and is then allowed to loan out about $9,000
to someone else. That person then deposits the $9,000 into a different
bank, who can then loan out $8,000, etc. So in the end $90,000 of new
money is created for every $10,000 deposit.

But the multiplier effect is not the only way the money supply increases,
because when the FED purchases government securities, it does so with a
FED check, which is a totally *new* form of money. In other words, when
the FED writes a check, new money is created. And yes, this means out of
thin air. But keep reading, because things get even more interesting.

Government securities (like Treasury Bills) are paper promissory notes the
government sells on the open market to raise money, which they then
promise to pay back at a fixed time later, with a bit of interest. The
government issues securities (various bonds, T-bills, etc.) in order to
raise money, which increases the national debt, because these notes must
be paid back when called upon (so long as it is past the maturation date
issued on the note).

So when the FED wants to increase it's reserves, it purchases government
securities with FED checks (new money remember), but it doesn't purchase
newly issued securities directly from the government. It purchases them
from the open market, from individuals and private institutions who have
already bought them and who want to sell. These sellers then deposit the
FED check into their local bank, and the multiplier effect again takes
over. So the money supply increases even more.

And note that as the fed accumulates more and more government securities,
the US government owes more and more money to the FED. But check this out.
The FED doesn't *need* government money, because they are the ones who
have the the power to print money anytime they want! And indeed, the FED
has *never* sold a government security, ever. In its entire history, it
has *never* decreased the money supply by selling it's government
securities and reducing its reserves. For 90+ years it has been buying up
US government securities!

This reminds of of something Anthony Sutton said. He told his father once
(who was a member of Skull and Bones), that he was worried about how large
the national debt was growing, and his father laughed and said, "Don't
worry son. We are loaning it to ourselves." Of course, by "ourselves" he
means the rich and powerful who control both the FED and the government.
He doesn't mean a government representing the people. By indebting the US
government to itself, any time it wants the FED could call in its paper
securities. But why would it do this? Certainly not when the economy is
growing, because during a period of growth it can just keep playing the
same game, issuing more money so banks can make more loans and collect
interest. But when the economy stops growing, when nobody is taking out
more loans, the game ends, and we are left with a situation where the US
government now owes a shit load of money to the FED, and the only way the
government can pay back this money now is by taxing the people.

No wonder the powers that be (including wall street and the banking
cartel) are supporting Obama now, and the media is saying more taxation is
good. In the past, they didn't want the government to raise money by
taxes. They wanted the government to issue securities and increase its
debt. But now that peak oil has arrived and the game is up, they are going
to create more taxes, and transfer as much of the remaining money to them,
in the form of bailouts, and by calling in their treasury bills.

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