Issue: Economic: What is Dr. Paul's plan to move to sound money?

[sideshowbob]

quotes in italics from http://thirdpartywatch.com/fedebook.pdf

p9 "If the reserve requirement is set at 10%, this means that for every $1,000 deposited, the bank must keep only $100 in its vaults - the other $900 can be used for loans. Remember Fez and Jackie? Well imagine they have $100,000 for their down payment in a savings account. The bank doesn’t need to keep all $100,000 on hand - it can loan out $90,000 of it. Let’s say the bank loans $90,000 to Eric, an aspiring entrepreneur. He takes the check for $90,000 to his own bank, which can then lend $81,000 (90%) of his deposit. They lend $81,000 to Donna, who deposits the check in yet another bank. That bank then lends $72,900 to another person - and on and on."​

This explanation of FRB is questioned in point v) of this document:
http://austrian-finance.googlegroups.com/web/monetary_evidence.pdf

p9 "In fact, the $100,000 that Fez and Jackie have in savings can be used for a full $1 million in loans! Now imagine the Fed decided to cut the reserve requirement to 5% - the effects would be devastating. Banks would need to borrow from one another, driving up the fed funds rate and relying on the discount rate. They would begin dumping their stocks and bonds on the open market, thus causing a market crash and driving up interest rates. Eventually, they would probably have to call in loans, and they certainly couldn’t make any new ones."​

http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html
"the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States."

p4 "Clearly, you can see how deflation can be a very bad thing for borrowers, but it is also bad for lenders. After all, if borrowers expect deflation, they will be unwilling to pay high interest rates. Interest rates in Japan were essentially zero for over a decade due to expectations of deflation. How can a mortgage lender make money in this type of environment?"​

This is to suggest that rates were low due to expectations of deflation but... "Expected future short-term rates are important determinants of current long-term rates." from http://www.ny.frb.org/research/capital_markets/ycfaq.html

 

[J.D. Seagraves]

Ron Paul!

 

[sideshowbob]

You say my first point is "questioned" in the Austrian PDF, but I don't see the "questioning." Could you please post it?

The system does not allow banks to get around the reserve requirements by lending "reserve money" to other banks and using that as "high powered" money.

Imagine a bank is at the limit of their reserve requirement. Their last loan was to Fez and Jackie who borrowed $225,000 on their $100,000 deposit. The bank can lend no more money. But what happens to the $225,000? Imagine that the person who sold the house which was bought by Fez and Jackie put that money on deposit at a bank. But imagine that this money is the first such deposit made to the bank...

Now the bank has $225,000 and (according to you) is able to make loans. But now the first bank decides to merge with the second bank. The first bank suddenly has $225,000 more deposits on which to make a loan. But this money is actually money which was lent originally by the first bank. So the first bank is now making loans based on "reserve money" of its own making. This is illegal and would result in infinite supplies of money.

This means that when we consider FRB, we need to consider the banking system as a whole. It is no good considering the behaviour of one bank in isolation because we must remember that other banks will be behaving in a similar way which means that there aren't opportunities for unlimited reserve lending.

When we consider the banking system as a whole we see that a deposit of $100,000 in "high powered" money can lead to $900,000 of new "reserve money" being instantly created by the first bank.

I don't understand the significance of your second quote from my book and the corresponding link - they do not appear to be contradictory.

This is to demonstrate that whilst you say that banks are constrained by their reserve requirements, in reality banks do not suffer concerns with regard to reserve ratios because the Fed is willing to extend new credit based upon money market accounts.

There is no constraint. Reserve ratios do not matter. Banks can "borrow" reserves!

And thirdly, if you are suggesting that deflation doesn't cause low interest rates, I have no rebuttal. Just look at Japan.

This is to contradict your assertion that the yield curve reflects opinion on expectations of inflation or deflation, whereas in actuality the futures market allows for speculators to drive the yield curve with predictions of future Fed rates.

 

[NewEnd]

I have been wondering about this alot. At first I Was all for it, but now, it seems not so great.

The dollar used to say you could redeem it for it's value in gold. But that was back int he day when gold was widely wanted for its symbolic power of wealth.

Now the dollar is basically backed by American products, bu tit would be awkward to have it say "this note can be exchanged for a cadillac, heater grill, goddyear tire... etc"

Of course, I dont see why we still could not just eliminate the fed, and put a cap on how much is printed every year.

 

[Gee]

What I would like to know is, who gets the new money first? I suppose its whomever borrows the most, and the recipients of government payments or salaries. But what social class borrows the most, as a whole? The rich? The poor? Corporations? During the housing bubble it was pretty obvious who it was, I guess.

I've seen how the people who get ahold the money first have a large advantage over those who don't, even just playing online games where the money supply is inflated heavily.

As much as I like Dr. Paul though, I don't trust the things he says about the Fed. He never seems to mention the advantages a fiat monitary system has, and never really explains why he feels hyperinflation is a danger in America (we aren't THAT in debted).

 

[Bob Cochran]

Didn't JFK actually manage to get United Sates Notes produced? Which were then withdrawn from circulation after his assasination? If so, how did JFK get it introduced?

I'd tell you...but then "they" would promptly assassinate me.:o

 

[Bob Cochran]

As much as I like Dr. Paul though, I don't trust the things he says about the Fed. He never seems to mention the advantages a fiat monitary system has, and never really explains why he feels hyperinflation is a danger in America (we aren't THAT in debted).

We aren't? If an 8.8 trillion dollar national debt and a 295 billion dollar trade deficit is not "THAT indebted", what would you call "THAT indebted"?

http://www.brillig.com/debt_clock/

http://www.americaneconomicalert.org/ticker_home.asp

______

One of the great tragedies in America today is how ignorant we are of our own economy.

I recommend the following web sites for good, independent viewpoints on the economy. Do be alerted, though, that many of the writers have fee-based subsription newsletters, etc...some of the writers are "permabears" and some try, unsuccessfully, to predict the future...but mostly they're smart, good economists/writers.


http://www.dailyreckoning.com/
http://prudentbear.com/
http://financialsense.com/index.html

______

Dr. Paul is a good independent economic thinker in his own right, and I believe his assessments are well considered.

http://www.paulonpaper.com/topic.php?id=9

 

[Gee]

We aren't? If an 8.8 trillion dollar national debt and a 295 billion dollar trade deficit is not "THAT indebted", what would you call "THAT indebted"?

Our national debt is 64.70% of GDP, about half as much as it was after WW2. Our M3 money supply is probably something like 11 trillion (the Fed stopped publishing the numbers on it, for reasons many question). Even if congress created the 9 trillion needed to pay off the debt overnight, we wouldn't have hyperinflation. We would have horrible inflation, to be sure, but nothing like what really accounts for hyperinflation in other countries.

Things look worse when you look at the social security and medicare obligations, of course. Even still most people don't think any sort of financial collapse is nearing, but just that we need to start doing something about it, sooner the better.

A good video on the problem is here:
http://news.bbc.co.uk/2/hi/programmes/hardtalk/4857646.stm

I'm really scared of what would happen if we got a democratic house, senate and president. I don't really care about parties, but any time you get a single party control of both the legislative and executive branch, it seems like there isn't enough deadlock to prevent spending bills from going through.

And yes, I've read everything Dr. Paul has written on the subject. I just don't see inflation as one of the bigger problems facing America at the moment. As an ex-Fed chairman William Martin (1951-'70) told Milton Friedman, the biggest problem is the spending of congress. The Fed can set interest rates so that inflation is kept low (~2%), but congress can demand more money for its programs and raise that number significantly. And frankly, I trust the secretive Fed bankers more than congressmen. As John McCain often points out, congress spends money faster than drunked sailors.

I definitely think its a problem that we are trusting our economy to the competence of the people who run the Fed. They messed up once in 1929, they could mess up again. I'd much prefer a free-market solution, but the Fed seems to be doing a passable job at the moment, so it seems to me like there are bigger problems facing America at the moment.

 

[Bob Cochran]

I just don't see inflation as one of the bigger problems facing America at the moment.

Wow.

A large chunk of the middle class is priced out of buying homes in many areas, at least using conventional loans.

What DO you see as the bigger problems facing America?

 

[NewEnd]

The fed should certainly be ditched.

It gives banks money at 5.25% right now, most people cannot get a loan at that rate.

What makes banks so special, that they get money from the government at a rate determined by a bunch of unregulated banks?

I am just owrried about going back to the gold standard.

 

[Gee]

Wow.

A large chunk of the middle class is priced out of buying homes in many areas, at least using conventional loans.

What DO you see as the bigger problems facing America?

The housing thing was certainly a big problem, but its over with, as its main causes were years ago when interest rates were extremely low, around 1%. Economies with commodity-backed currencies have problems and business cycles as well, after all.

I see Iraq, and the whole "War on Terror" garbage, as a bigger problem, which is causing inflation as well. Also the growing wealth gap in America, which contributes to crime and other things. Housing price explosions is certainly part of that, but other counties with less fiscally responsible banks and lawmakers don't have as large of a wealth gap as the United States has,
http://upload.wikimedia.org/wikipedia/en/d/d4/Gini_since_WWII.gif

 

[J.D. Seagraves]

Ron Paul!

 

[J.D. Seagraves]

Ron Paul!

 

[J.D. Seagraves]

Ron Paul!

 

[Bob Cochran]

The housing thing was certainly a big problem, but its over with...

I believe the fallout of it is just getting started.

 

[NewEnd]

1. This is like saying that Wal-Mart should be abolished because it can buy a roll of toilet paper for $0.39, but customers have to pay $0.59. Banks get money wholesale and lend it retail.

No it's not. The government does not create toilet paper out of thin air.

Money? wholesale?
Why not give it to the people, wholesale?
Why do we need banks?
Why do we need a middleman?

But more importantly, banks almost never rely on the Fed for money - they borrow from one another. Ever heard of profit? It's kind of a cornerstone of capitalism.

Show me some proof Banks borrow from eachother, please. That's news to me. what I mean is, why woudl they borrow from eachother, when they could borrow from the fed? Why would one bank give it's competition a loan for a lower APR than the fed's offer?

That's madness.

2. The Fed is far from unregulated.

1. Name the banks in the Fed.
2. Name what government agency they answer to.

3. The gold standard and the Fed are not mutually exclusive. Although I think you are right to be worried about returning to a gold standard.

I didn't say they were. I am against gold standard, pro-abolish the fed.

 

[Gee]

In the absence of the Fed, FHA, FNMA, etc., only the rich would own property. And there would be far fewer rich people.

In the absence of the Fed, we'd probably have market solutions. A currency is not rocket science, after all. Just like different credit cards carry different interest rates, different currencies could arrise with their own systems of interest, or backing (if any).

I think if you look at the US economy's growth prior to 1913, you'll find it grew just fine without the Fed. There were still business cycles, of course, and you have to look at the growth corrected for inflation (since inflation can increase GDP so rapidly).

 

[jon_perez]

1. This is like saying that Wal-Mart should be abolished because it can buy a roll of toilet paper for $0.39, but customers have to pay $0.59. Banks get money wholesale and lend it retail. But more importantly, banks almost never rely on the Fed for money - they borrow from one another. Ever heard of profit? It's kind of a cornerstone of capitalism.

2. The Fed is far from unregulated.

3. The gold standard and the Fed are not mutually exclusive. Although I think you are right to be worried about returning to a gold standard. The money supply would not keep up with economic growth, and thus, deflation would ensue. We would all be living in caves within twenty years, and I'm only being slightly hyperbolic.

I believe the plan is not necessarily to return to a gold standard, but to legalize gold, silver and other candidates as tender... perhaps to force the Feds to be honest or get the market to make them irrelevant.

Clearly, Ron Paul is the gold bugs' friend.

 

[J.D. Seagraves]

Ron Paul!

 

[J.D. Seagraves]

Ron Paul!