An Old Road We’ve Been Down Before (And Just Don’t Want To Remember…)

great-depressionMoney” is an article…a short article at that, which  lays out the facts. Facts in fact, free of politicians’ baloney. It’s worth a read. If you can’t be bothered, (It IS your money going down the drain) here’s the short version:

Your Federal Reserve loans money to banks at what amounts to interest-free rates. That does a couple of things. One you don’t hear about is, it prevents retirement plans that provide pensions (mostly government plans, these days) from earning enough from safe investments to pay those pensions. Which is a big reason so many city and county and even some state pension plans aren’t adequately funded. How do you earn enough from safe bond investments when interest rates are held so low?

Another is, it allows those borrowing banks to sit on the money instead of lending it out, since it’s costing them so little. And the risks of lending these days, are not small. Would you lend at low rates against substantial risk? Neither will the bans; if you face more risk, you need more interest. And when too many are out of work and owe too much, risk goes up. Demand for loans goes down, too.

So, some 81 % of the money the Fed has obtained from the air and loaned to the banks, sits idle; it’s not loaned out by the recipient banks because they can’t earn enough from it to cover the risk of lending it. Anyway, the line of would-be borrowers in this moribund economy is short. So as you’ll see in the graph of money velocity (turnover) most of the Fed’s funny money is just sitting in the banks.

When the banks do start dumping that money into the economy, the larger number of dollars it creates will be applied to an actual wealth that hasn’t increased, so the dollar price of items of wealth will rise; that’s called inflation.

The Fed wants to suck up its funny money and pull it from the economy before that can occur. Last time it did that big time, it brought on the famous Great Depression of the 1930’s. So it needs to be careful. In history, kindly note that it nor any central bank has been that careful. (Just so you know.)

So where that leave us, is ths:

1. The Fed can keep adding money to the banks in the delusion that it’s adding it to the economy, until so much money is sloshing around an unchanged (and even, shrinking) amount of actual wealth, that we end up in a reprise of the Weimar Republic. That one went south via inflation, you may Google it.  Or,

2. The Fed can raise interest rates (the actual cost of money) and thereby bankrupt the governments that have to pay such interest on their borrowings. (Which governments are, by virtue of their deficit spending, already bankrupt.) Oh, and destroy the banks while at it.

In olden days, this was called a “Hobson’s choice” (You may Google it) but the gist of it is, on one side is a rock and a hard place sits on the other.

We’ve had it, we’re just awaiting reality’s arrival. When an emotional swing next drops a major stock market by enough to get attention, you’ll see it.

But you aren’t gonna like it…

You can hope this is wrong, best do that. And hide a few bucks and some odds and ends of value under the mattress. Won’t hurt if you don’t need them…

The photo is from the Great Depression. The only reason you don’t see these scenes now, is food stamps, disability payments and what’s left of unemployment compensation. But those, remember, are being paid by deficit spending… money the government actually doesn’t have. What’s next?

About Jack Curtis

Suspicious of government, doubtful of economics, fond of figure skating (but the off-ice part, not so much) Couple of degrees in government, a few medals in figure skating; just reading and suspicion for economics ...
This entry was posted in Bank Failure, Debt, Depression, Domestic Policy, Economics, Fiscal/Financial Responsibility, Inflation, Overspending, Politics and tagged , , , , , , , . Bookmark the permalink.

52 Responses to An Old Road We’ve Been Down Before (And Just Don’t Want To Remember…)

  1. the unit says:

    Commorating the day of our founding founders, according to the present administration… not fathers. Was going to buy a new grill to help the economy. But decided to use old grill that I’ve used since this administration came into “rule.”

  2. How much background do you have in economic theory?

    • Jack Curtis says:

      I don’t know how to answer, but I’m certainly not an economist. The subject seemed most sensible to me when they were still calling it “political economy.” It’s difficult to take seriously a ‘science’ that seems unable to predict major economic events or agree on their explanations after they have occurred. This admittedly cavalier attitude suffuses my writing on that subject, though I do try to be factually accurate and avoid the abstract and abstruse, most of which in economics, seems to me to occupy the place of dark matter in physics. I hope that this has answered your question. I’ll happily consider your economic explanations at least as worthy as my own.

      • Based on your study, how does the Fed operate, what does it do?

      • Jack Curtis says:

        It operates politically under economic/independent guise to interfere with the U.S. (and increasingly, the world) economy. It controls the bank cartel to a degree, insures deposits, publishes statistics, prints the currency etc. Oh yeah…it ruins retirement planning by sitting on interest rates and floods the hapless economy with fiat money/credit) Note:If all the money the banks are sitting on as excess deposits of reserves gets loose, we might start remembering the Weimar experience… I believe Ron Paul is correct: End the Fed! President Jackson did it, where is he when we need him? And after President Wilson gave us the Fed, he ended wishing he hadn’t, I wish so, too!.

        You can probably best characterize my economic views as generally Austrian, if that helps.

      • Can you elaborate with supported documentation? Preferably from an academic website (just to rule out crazy websites)?

      • Jack Curtis says:

        Elaboration with citations on a subject as prolix as economics is a bit beyond my capabilities but as reasonably representative in general, of my views of the subject, I can recommend regular visits to:

      • I’m well versed in neoliberal economic theory, I have a Masters in political economy, and what you have stated does not necessarily fit the facts.

      • Jack Curtis says:

        Well, economics seems a bit of a rubber ruler, to me. People find the dimensions they want to find, I think because the subject is uniquely distorted by being embedded in politics. But if I’ve departed from facts, I’d much like to rectify that; I regard facts as friends and dislike leaving them…

      • So could you support your claims with facts from a reputable source?

      • Jack Curtis says:

        Well, which claims? What is a ‘fair’ fact? A ‘reputable’ source? I don’t respect misleading, my ends don’t justify my means and I hope, truth is where I find it, not where I put it. But I’m as good as any at kidding myself nonetheless. Rather than claim too much, I prefer to work with the particular rather than the general in such areas as thi…

      • Well, with respect to central banks, there are certainly issues, but they are a mainstay of the global economy and utilized in some form by every country on the planet, so if you could use something reputable, I use academic websites, to explain how what you are saying is true, I would be interested if you could. Every country on the planet has a central banking system that utilizes the IS/LM model of some sort, and they all work. It is only in the US that it does not work. How is Ron Paul’s idea going to work? What will it mean? Etc…

      • Jack Curtis says:

        I’m pleased to be able to recommend the links below to first, a talk about the Fed by Murray Rothbard and then his book: “The Case Against the Fed.” You’re likely well aware that our country proceeded without a central bank in the past. I’m not persuaded that the central banks elsewhere “work,” any better than does the Fed. The E.U. for instance, is in the throes of a similar overspending meltdown, Japan has just reversed course toward reflation and China’s economy has a large cash problem just now. Rothbard, as you requested academics, was a professor of economics.


        Click to access fed.pdf

      • Sorry, I’ve been insanely busy, but one quick question. If the Fed is bad, in an a priori sense, why is it that every developed nation on the planet has some sort of similar institution? Also how would you propose to deal with the fluctuations from normal economic forces?

      • Jack Curtis says:

        Busy… Yes, life has altogether too much reality attached to it.

        Why do most places have central banks? One can respond: Why are governments corrupt?” Government always wants control of the money simply for the power it provides. Money from competing banks rather than from the government also works but government has seldom left it alone; the power is too tempting, I think. The Founders were split on the idea; Hamilton strongly supported it but Jefferson was as strongly opposed. They agreed as to the power involved; Hamilton wanted that power for government but it was seen by Jefferson as a tool of tyranny if my recollections are correct.

        How, without a central bank, to deal with economic fluctuations? First we will have to agree that central banks deal with fluctuations rather than cause them, an assumption I’m not ready to yield at this point. A pertinent book: The book is an explanation of America’s Great Depression; it elucidated the role of the Fed in that experience in detail. It is also by Professor Rothbard and is considered among his best work and a leading exposition from a non-Keynesian. Rothbard is, I believe, closer to Hayek. f

      • Do you understand the IS/LM model?

      • Jack Curtis says:

        Investment Saving/Liquidity Preference Money Supply: Two curves on a chart. Seems a big gulf between the little chart and all of economic reality it’s trying to describe… A number of necessary assumptions in need of exposition. It’s unnatural for me to consider the subject (human behavior) via formulas. As said, I’m no economist.

        I suppose we’re safe with supply or demand curves, graphing observations to increase understanding. If we’re careful doing it. But when we start piling such lines on top of each other and assuming we can predict how things will end up, the accumulating uncertainties are unsettling, at least, to me. I’m not that smart. And from what I see, neither are the economists who can’t seem to predict things until after they’ve happened!

        Seems to me too, there’s often a lot of political leverage distorting economic activities that, left alone, would end differently. But the economists never seem to deal with that reality Which is the reason “political economy” seems preferable to “economics” to me..

      • Well, the IS/LM model IS political economy? Quantitative political economy is a huge segment of the field, and the quantitative element is merely an expression. This is also one of the standard models used, since it takes government actions, central banks, investors, and consumers into the mix. I see you copied the definition from Wikipedia, but I would recommend reading more on it, the Wikipedia page is good if you have been exposed to it, but not for the layman. I’ll see if there is something else out there.

        Nevertheless, the entire point of the model is that you can see what would happen with “economic activities that, left alone, would end differently”. And this is the reason that every modern country in the world has some form of central banking, the economics (and political economics) supports it. Why is it, once again, that only in the US is this a failure?

      • Jack Curtis says:

        I understand, but have difficulty with the predictive utility of the cited formulation first, and second, strongly question the proposition that central banking works better anywhere else, citing China, Japan and Europe as examples. Europe’s banking seems lined up behind Cyprus; Japan just lurched from near stasis to reflation and China’s problems are being revealed as its market shrinks and its own costs rise, seems to me.

        I know that economists (Americans especially) like formulae though Austrians don’t. Their choice. Alfred Korzybski reminded that “the map is not the territory” and for me, economists have some trouble with that interface. I see the cited IS-LM chart as more useful for analysis than for planning.

        My greater concern though, is that politicians don’t care about economic motives; they are wedded to political ones. And they seem generally able to find an helpful economist who will bless their preferred policy, whatever it is. That seems to me an overriding factor in public policy and also one for which the economists have no provision.

      • Do you fully understand what central banks do IAW the model? You seem to be confusing their role and other roles. Japan, China, Europe, etc… all have somewhat different views, but still act in relatively the same way, though China is a bit odd. And you seem to be blaming issues on the banks that are not their fault.

        Also Austrians are wildly dedicated to quantitative economics. The most neoliberal economic program in the US is at the University of Chicago, which is almost absurdly quantitative?

        And, as for the political element, this is why it is called political economy.

      • Jack Curtis says:

        The Fed is often blamed to the exclusion of Congress when that is myopic, granted. Past that, I need specifics to respond.

      • What more specifics do you need? The IS/LM model, macroeconomic political economic theory is fairly straightforward in the need for a central bank.

        What are you opposing?

      • Jack Curtis says:

        I dislike central banks for the same reasons Murray Rothbard decried them in his book. Simplified, they replace the economic with the political for banking and money management and that is destructive as I see things. I cite the E.U, the U.S, Japan, China, Argentina, Brazil etc. All are in monetary difficulties, commonly uncontrolled spending facilitated by the central banks. The basic concept of fractional reserve banking is part of that; it always seems to escape its bounds for political reasons and that leads to failure, The IS/LM model is a model, it is not congruent with the real economy and can’t be relied upon for prediction.

        I do recommend Rothbard’s book; he’s the academic source you requested and very much the economist that I’m not. (And his stuff is easy reading…)

        Meantime, consider: Would you like to be the Democrat rancher whose finances depended upon doing business with a Republican banker whom you knew was in bed with the town mayor, the sheriff and most of the other ranchers, some of whom wanted your ranch?

      • Not to belabor the question, but what about the role of central bank in political economy do you not like, it actual political economic terms? How is the IS/LM not “not congruent with the real economy and can’t be relied upon for prediction” since it is not used for prediction, it is a short term tool (the Solow model is more predictive)?

        Have you studied any of this at all?

      • Jack Curtis says:

        I’ve said, I’m no economist, for which they are surely grateful. I’d rather discuss the details of the relevant economic facts and ideas than discuss details of how I came by my opinions. I’ver already provided references and sources. Suffice it to say, I’ve taken a few college courses and read a lot. Of your list, I prefer Hayek, I too have read Smith (readable), Ricardo (dry), Bastiat, Keynes (before and after his epiphany in 1926), and more applicable for me: von Mises and Rothbard.

      • The IS/LM model is political economy, not economics. It is macroeconomic theory.

        So, how is this “not congruent with the real economy and can’t be relied upon for prediction”?

      • Jack Curtis says:

        1. Put another way, it is a part of macroeconomic theory that remain, like Darwinism, the Big Bang and dark matter in physics, a working hypothesis with considerable acceptance but it remains unproven and that imposes limits on its use. It’s only a way to arrange and compare data point; from there, it’s assumptions.

        2. Political economy is my preferred term; I’n not convinced that ‘economics’ is appropriate. I’d love to see an economy without politicians meddling with it but it seems to remain a fiction.

      • I can’t think of a major economist who opposes the IS/LM. It is not perfect, but it generally works well. Most who may oppose it would be neo-Marxists, but I cannot think you would agree with them.

        Political economy has nothing to do with politicians? It has to do with states?

      • Jack Curtis says:

        I don’t oppose the graph, merely see it as of limited use and subject to what I’d call, overly broad application. The economists that make the most sense to me, are the Austrians (who are not a subset of the monetarists)

        I’ll leave defining political economy correctly to you; as said, I’m no economist. I cannot disentangle the State from politicians in my mind, since every state is the creature of the politicians who run it. I guess I was inoculated with Maritain in school; I still see the state as organic. I know that has gone out of fashion but the alternatives don’t hold up for me. I’m not a follower of fashions, no more do I suppose, are you.

      • You see it of limited use because you never saw it before I brought it up. I would study it for a while, more than just Wikipedia, and see what is there. The graph is just a concept, there is far more there that you are ignoring.

        Didn’t you previously say you did not like economics you liked political economy? But don’t seem to see the distinction between the two.

      • Jack Curtis says:

        You’re correct, I don’t see a distinction between economics and political economy. I see the older term as more descriptive, hence preferable.

        You read Rothbard on the Great Depression and I will pursue the LS-IM…

      • WRT Rothbard, can you explain why his argument is valid considering the success of central banking elsewhere?

      • Jack Curtis says:

        I don’t see that central banking succeeds anywhere, in the longer term. All of them, in the end, inflate for political reasons. The Bank of Japan has joined the inflators, the ECB is bailing with funny money like the Fed and just now, only the Bundesbank has been favoring restraint, so far as I know.

      • Except many countries such as Sweden or Canada avoided massive fallout like in the US, but their banking sectors are much more regulated than ours are/were. How do you explain this?

      • Jack Curtis says:

        Canada reduced its debt in the 90’s; I don’t know what its present condition amounts to.Sweden rebalanced; cutting spending and services. The Swedes grumbled but accepted it. The U.S. remains politically paralyzed and both parties are feeding that instead of finessing it. I suppose because their support bases have become very divergent. I don’t think the degree of regulation is a significant factor. Most E.U. countries are in the same boat as the U.S. regardless of regulation. To me, excessive debt is usually more a political than a regulatory issue.

      • You’re ignoring the significant regulation on both Swedish and Canadian banks. The regulations, which neoliberals oppose, have strengthened the economy, which includes the central banks, so how does your theory account for this?

      • Jack Curtis says:

        Canada paid down its debt in the 1990’s but its current position does not demonstrate control of spending: Canada is therefore not a good example of successful regulation.

        Sweden has been reducing its debt substantially with an increasing GDP.

        This is why the spenders were replaced:

        This is what the new Finance Minister set out to do:

        In 2009, the Swedish Finance Minister pushed less spending, lower taxes and privatizing some healthcare::

        And this describes what was done…turning some 27% of health care over to private, for-profit enterprise:

        So Canada is back into debt trouble and Sweden has divested from government health care and education to significant private enterprise. Therefore, they don’t sustain the position that you invite me to examine…

      • Why are you discussing regulation of the banking sector in comparison with government expenditures…? Do you realize the two issues have nothing to do with each other?

        Additionally Sweden is reducing debt, while spending more on social programs, schools, child care, infrastructure, etc… than the US. But in the US we have to cut these programs to reduce debt….explain? It seems that Sweden is successful doing the very things that are decried as “Socialist” (admittedly by people who could not define socialism if their lives depended on it, but still).

        Why does Socialism lower debt in Sweden, but not the US?

        If you want to cite articles, can you cite a specific statistic, and the basis of the statistic?

      • Jack Curtis says:

        Bank regulation/government spending are different subjects, The spending seems relevant to my subject; central banks not only facilitate but (I think) guarantee overspending. Sweden is succeeding with its correction of earlier financial mismanagement; while the U.S. plays ‘sequester’ games instead. Why? My opinion: Sweden remains reasonably cohesive, a single society with mostly common values. The U.S. society is sharply split between the old Classical Liberal, religious, Constitutional, Horatio Alger mystique and the new atheist, morally relative, statist and pessimistic younger folk. The society is losing cohesion to the point that the politicians from the two sides are failing to cooperate, since they depend upon reinforcing the division for their positions. Perhaps you have a better analysis? If so, I’d be pleased to see it.

      • Your characterization of American society is the precise reason for the American divide.

        I am unabashedly liberal. I have extensively studied economics, politics, history, foreign relations, and I have come to the conclusion after copious amounts of study that liberalism is more rational than Conservatism. But this was based on a full reading and examination of both philosophies. I do not think Conservatism is evil, I just do not think it is the best idea out there. I also fully recognize that most people who call themselves Conservative don’t know what the term means, have never read the relevant source material, and probably never will.

        I am also deeply religious, I have invested an equal amount of time in studying religion, my own and others, I am well versed in Patristics, Scripture, exegesis, and history. I have studied Islam at al-Azhar, studied Judaism in Jerusalem, and spent time in Buddhist retreats. I am an ordained minister, with all of the rights and responsibilities that go along with it, with a congregation to lead.

        Your characterization of those who you intellectually disagree with is the problem, not the people who disagree with you. You have a false perception that is untarnished by any effort to understand or even sympathize with alternative opinions. And you are not alone.

        The current right-wing movement is based on creating a false caricature, and then telling people to fear and hate that caricature. Have you ever attended a Democratic politically meeting and spoken to the people there? Have you studied any of the major works of liberal thought? If so, what?

      • Jack Curtis says:

        Thank you for clarifying your position. I suspect that we disagree on less than you may assume. You are a modern Liberal, though you have not accepted their currently atheistic premise. I am not a political modern Liberal, that is correct but assuming that I’m a Conservative, is not. I agree mostly with Libertarians (and Classical Liberals) re government but I cannot join the :Libertarians since I see no reality in their proposals.

        It seems to me that our primary area of disagreement is only whether or not to place one’s faith in government as the means for dealing with issues concerning which we likely otherwise, largely agree.

        Both the market and government are merely (natural) aggregations of people. I think that, if one accepts one of them subject to a bridle, then the same must be said of the other.

        And yes, I’ve studied, read, explored and have highly intelligent and very Liberal friends. (Most of whom get too excited to permit ongoing discussions of politics). I believe that politics trumps economics; that is a large part of my dissatisfaction with government. (And low opinion of much of economics) I believe that we are watching a test case right now, the results of which will allow one of us to feel his case is supported in reality; that is the E.U.

        If I understand, you accept those countries or several of them, as suitable models for their education, healthcare and government. I, in the other hand, see them as having outrun their resources to accomplish what they have, and predict an unpleasant economic decline that will curtail those services substantially. All that is necessary to know which is correct, is to wait and watch the next year or perhaps, two,

    • the unit says:

      JCurtis I’ve had enough of J.A. Perhaps it is stimulating for you. I think its wasted stimulus though. Can he elaborate with a doctor’s report that he’s of sound mind? Asking for academic website, ruling out crazy ones, makes me wonder. Of course still a free country and I don’t have to read comments. 🙂

      • Jack Curtis says:

        Well, if he’s just trying to ask endless questions to no purpose, I might come to feel that way too. But I don’t mind someone questioning my view and antecedents on a subject I’ve advertised in the heading of my blog, Seems to me a reader is entitled to ask about that. If I were selling a product, I’d expect to answer questions about it…and here, I’m selling opinions and ideas so I should expect to answer questions about that, I think. If it gets tough, I can always add another glass of wine at dinner…

      • You’re afraid, there is nothing wrong with that, but if you asked and could answer more questions you would not be in the state you are in. Just a thought.

      • That was to “The Unit” BTW.

      • the unit says:

        You’re selling and answering questions pertaining that. The buyer determines success. J.A. doesn’t buy and is competitor and hijacker of ideas. I don’t buy anything from J.A. because fancy words and ideas cause distortion of truth. As to the BTW to unit, common sense has served me well for quite a long while. Questions are asked from many sectors and I just answer personally to my situation and not necessarily to the askers.

      • Unit, what you have said makes no sense. You are afraid of information and “fancy words” (which are not fancy). This is a failing in your education, but it is not an insurmountable failure. Common sense is also a myth, it does not exist. The world is complicated and understanding and utilizing complexity is a necessity.

      • the unit says:

        A myth? Then you couldn’t possibly have any. And that is obvious and explains all I need to know.

      • Unit, the world is an insanely complicated place, the engineering, politics, economics, sociology, culture, language, etc… that are required to operate in the world require study and development. People who reference “common sense” are either downplaying the need to understand complexity, or else they are ignorant of the complexity around them. There is a reason engineers, scientists, doctors, etc… go to school for so long with such difficulty. Only the ignorant downplay the need for education, and this is an uncomfortable fact for many, since study is hard and people are lazy.

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