Could the Weimar Hyperinflation Happen Again in America?

This is a discussion on Could the Weimar Hyperinflation Happen Again in America? within the Economic & Fundamental Analysis forums, part of the Methods category; Originally Posted by Atilla So how does the US government or Fed control the Banks then? So what is the ...

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Old Feb 26, 2010, 2:37am   #511
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

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Originally Posted by Atilla View Post
So how does the US government or Fed control the Banks then?

So what is the difference between the multiplier effect and banks ability to raise loans using the same money that is deposited with them? I trust we are not debating jargon use of words here...

I must go as time is debt. Mustn't create more debt.
Nice sarcasm. You get a point.
As to that last, as you know, the only monetary assets that aren't someone else's liability are the PMs: gold and silver.
I quoted the part about the multiplier because that's the crux of the problem.
What you're not getting is this: reserve requirements exist to be broken. Which means the answer to your first question is, they don't. They really don't.
Have you ever heard the one about how at the beginning of creation all the different parts of the body wanted to be boss, and finally the asshole won out by closing tight and staying closed until all the rest of the parts of the body gave in and let him be boss?
It's funny because we all think the brain is boss. But - and here's one you probably never thought about - which part of the body is thinking the brain is boss? The brain itself, of course.
In the same way, the Fed is recognized by everyone else as boss of the banking system, and of course the Fed thinks so too. But they would, wouldn't they?
All it does is allow reserve expansion to happen in flush times because banks - here's the important part; it's in that Keen link which you really have to read - make loans first and find the reserves later.
As Keen points out, if loans exceed the reserve limit, the Fed really has no choice but to relax policy. They're in the business of keeping credit flowing smoothly, not suddenly applying the air brakes when things start going too fast.
This exactly accords with my experience supporting the Fed Funds desk at a super-huge bank. Reserves were seen merely as a bureaucratic rubber stamp that had to be fig-leafed somehow. You had to report once every two weeks, on what was and is still known as Fed Wednesday. If your reserves were too low, you went out and got them somehow in the interbank market. If they were too high - that is, greater than your reserve requirement - you lent them out to some other bank who needed them. Since reserves are just a percentage of deposits, and since if you loan someone money at bank a, it becomes a deposit at bank b, the reserve requirement means exactly nothing. Games got played by the Fed Funds traders on Fed Wednesday, games that everyone enjoyed but that everyone knew meant zip to the actual everyday functioning of the bank. Once Fed Wednesday was over, no one gave a hoot what the reserves were. As it came close, the traders would see what the position of the bank was, and start to either buy or sell money so that the proper number got reported.
I did this for a long long time, and I can tell you categorically that the bank never turned down a loan just because making it would screw up the reserve position.
The Fed is powerless. The reserve requirement is their strongest tool for restraining or expanding credit, and to the big banks, it means zilch. They're way too sophisticated to allow a little thing like a Fed reserve requirement get in the way of making money. Quite literally making money.
Which, finally, means that multiplier you learned about in school, and that the Chicago Fed makes such a big deal about in that pdf, is a fairy tale. Doesn't exist. Or rather, it does, but only now, in bad times, because as loan demand dries up and other loans are defaulted on, debt goes up in smoke and money disappears. The multiplier exists, but it exists only in bad times. In good times, it's a joke.
I understood instantly what Keen was talking about because it fit so perfectly what I saw in the Fed Funds department. But even if you've never worked there, he presents some strong evidence that the reserve requirement means nothing, because he shows that credit expansion comes before money supply goes up. First loans are made, and then money supply goes up, not vice versa, as would be the case if the Fed's open market operations, for instance, meant anything to the money market.
So, that's the long and complicated answer. The short answer is in those 10 points.
BTW, saying no to Lehman was done because, you have to remember, Lehman wasn't part of the Federal Reserve System. Legally there was quite literally nothing the Fed could do, other than facilitate its sale to a third party, as they did with Bear. When no buyer was willing to take it, the game was over.
If anything, that was a further illustration of their powerlessness: not only can't they restrain the banks within their system, they can't do anything at all about credit providers like Lehman who exist entirely outside the Federal Reserve system. And in the recently demised boom, that amounted to a lot more than just the pawn shop down the block: there was Lehman, Merrill, Goldman, Morgan Stanley, and a numberless host of small-time mortgage originators all over the US, all of them providing credit entirely without reference to the Fed's reserve requirement.
Which makes that multiplier even more irrelevant, once again, except in bad times, and in bad times it exists despite the Fed, not because of it, as we are now seeing.
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Old Feb 27, 2010, 3:09pm   #512
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

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Originally Posted by Benton D Struckcheon View Post
Nice sarcasm. You get a point.
As to that last, as you know, the only monetary assets that aren't someone else's liability are the PMs: gold and silver.
I quoted the part about the multiplier because that's the crux of the problem.
What you're not getting is this: reserve requirements exist to be broken. Which means the answer to your first question is, they don't. They really don't. They also exist to be enforced. Consequences of breaking these rules are clear in US and in Greece compared to Canada or Germany.

Have you ever heard the one about how at the beginning of creation all the different parts of the body wanted to be boss, and finally the asshole won out by closing tight and staying closed until all the rest of the parts of the body gave in and let him be boss?
It's funny because we all think the brain is boss. But - and here's one you probably never thought about - which part of the body is thinking the brain is boss? The brain itself, of course.Yes I have heard of that story. However, the asshole only fails to work when abused by the brain...

In the same way, the Fed is recognized by everyone else as boss of the banking system, and of course the Fed thinks so too. But they would, wouldn't they? If I recall correctly wasn't the republicans asking for tax breaks and cheap borrowing to stimulate the economy. Didn't Mr Greenspan play ball and facilitate easy credit. Surely those guys were the brains and not the assholes you refer.

All it does is allow reserve expansion to happen in flush times because banks - here's the important part; it's in that Keen link which you really have to read - make loans first and find the reserves later.
As Keen points out, if loans exceed the reserve limit, the Fed really has no choice but to relax policy. They're in the business of keeping credit flowing smoothly, not suddenly applying the air brakes when things start going too fast.
This exactly accords with my experience supporting the Fed Funds desk at a super-huge bank. Reserves were seen merely as a bureaucratic rubber stamp that had to be fig-leafed somehow. You had to report once every two weeks, on what was and is still known as Fed Wednesday. If your reserves were too low, you went out and got them somehow in the interbank market. If they were too high - that is, greater than your reserve requirement - you lent them out to some other bank who needed them. Since reserves are just a percentage of deposits, and since if you loan someone money at bank a, it becomes a deposit at bank b, the reserve requirement means exactly nothing. Games got played by the Fed Funds traders on Fed Wednesday, games that everyone enjoyed but that everyone knew meant zip to the actual everyday functioning of the bank. Once Fed Wednesday was over, no one gave a hoot what the reserves were. As it came close, the traders would see what the position of the bank was, and start to either buy or sell money so that the proper number got reported. I see what you are saying here but this is where risk management and bank regulation should kick in. What is the difference in the banking system practiced in the US re:Fed and lets say Canada or Europe?
I did this for a long long time, and I can tell you categorically that the bank never turned down a loan just because making it would screw up the reserve position.

The Fed is powerless. That must be an understatement. I would have said the Fed is not accountable to anyone. So who sets the reserve ratio. who manages and regulates the finance system in the US? Are you stating no one. Not the Fed or the Senate? Well if so you have identified possibly the downfall of the US empire.The reserve requirement is their strongest tool for restraining or expanding credit, and to the big banks, it means zilch. They're way too sophisticated to allow a little thing like a Fed reserve requirement get in the way of making money. Quite literally making money.

Which, finally, means that multiplier you learned about in school, and that the Chicago Fed makes such a big deal about in that pdf, is a fairy tale. Doesn't exist. Or rather, it does, but only now, in bad times, because as loan demand dries up and other loans are defaulted on, debt goes up in smoke and money disappears. The multiplier exists, but it exists only in bad times. In good times, it's a joke. I'm not sure what your interpretation of the multiplier is but the reserve ratio determines quantity of money that banks can make. That process is the multiplier. Whether people refer to it in bad times and not in good times is down to once again risk management and regulation.

I understood instantly what Keen was talking about because it fit so perfectly what I saw in the Fed Funds department. But even if you've never worked there, he presents some strong evidence that the reserve requirement means nothing, because he shows that credit expansion comes before money supply goes up. First loans are made, and then money supply goes up, not vice versa, as would be the case if the Fed's open market operations, for instance, meant anything to the money market.
So, that's the long and complicated answer. The short answer is in those 10 points.
BTW, saying no to Lehman was done because, you have to remember, Lehman wasn't part of the Federal Reserve System. Legally there was quite literally nothing the Fed could do, other than facilitate its sale to a third party, as they did with Bear. When no buyer was willing to take it, the game was over. So Lehman was an institution not bound by any rules or regulations and was able to print US dollars independantly. They were not part of the Fed Res System... What were they then? Bank - Investmnet House - Mortgage provider.

Begs the question what were Fannie May and Freddie Mac? Did they participate in the Fed Res System?


If anything, that was a further illustration of their powerlessness: not only can't they restrain the banks within their system, they can't do anything at all about credit providers like Lehman who exist entirely outside the Federal Reserve system. And in the recently demised boom, that amounted to a lot more than just the pawn shop down the block: there was Lehman, Merrill, Goldman, Morgan Stanley, and a numberless host of small-time mortgage originators all over the US, all of them providing credit entirely without reference to the Fed's reserve requirement.
Which makes that multiplier even more irrelevant, once again, except in bad times, and in bad times it exists despite the Fed, not because of it, as we are now seeing.

In summary the crux and origins of the meltdown have been pretty well documented as taking on excessive risk lending to people who couldn't afford them in the first place.
Repackaging and relabelling of financial instruments and then re-classifying them was another factor.

However, we are now moving away from the terms of money and how the money supply is controlled. From what you are saying it seems it is pretty much a wild wild west thing in the US and all financial instititutions are lawless cowboys and the Fed coupled with the White House are pretty much a non-entity. This is not my understanding and your opening sentence holds the key...

Reserve requirements need to be enforced and financial markets need to be regulated.

Self regulation obviously does not work.
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Old Feb 27, 2010, 5:30pm   #513
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

I keep suggesting to the Yanks that they open up Alcatraz and stuff it with their numerous crooks. And if that's insufficient space then build some more.
They bankrupted the world and just get a ticking off !! It beggars belief.
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Old Feb 28, 2010, 4:01am   #514
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

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I keep suggesting to the Yanks that they open up Alcatraz and stuff it with their numerous crooks. And if that's insufficient space then build some more.
They bankrupted the world and just get a ticking off !! It beggars belief.
It was hardly just us: RBS pays billions while Commerzbank bankers get nothing
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Old Feb 28, 2010, 4:08am   #515
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

whats worse is RBS is almost totally owned by the tax payer!
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Old Feb 28, 2010, 4:31am   #516
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

Quote:
Originally posted by Attila:

That must be an understatement. I would have said the Fed is not accountable to anyone. So who sets the reserve ratio. who manages and regulates the finance system in the US? Are you stating no one. Not the Fed or the Senate? Well if so you have identified possibly the downfall of the US empire.
Obviously there is an official reserve ratio, set by the Fed. Without even getting into anything else, it should be obvious that if you can securitize a loan and sell it off, this frees you to make more loans. This is an international, not just a US, practice. Therefore, throughout the world, reserve ratios are flouted regularly in good times, when people are willing to buy the securities offered by the banks.
In bad times, the multiplier exists only because the whole thing goes into reverse: as loans are defaulted on, asset prices deflate, more loans get defaulted on because of the lower asset prices, more people default, and so on.
Just to give a quick example of this in action: the lousy economy is causing one of my neighbors, who owns his own business, to possibly have his house foreclosed. He's in at least the second wave of defaults, not the first. He was considered a worthy borrower when times were good, and he was. Now he's not anymore. There are lots of people in this position.

Lehman: Lehman was an investment bank. Investment banks were not regulated by the Fed.
AIG was an insurance company, and they were up to their eyeballs in this as well. Also, not regulated by the Fed.

As for enforcement, I don't know how it's done in other countries. I suspect culture plays as strong a role as official action. As far as official action, the moment I found out the bank only had to report its reserve position once every two weeks I knew it was a fiction. Obviously, especially in this time of instant electronic transactions, reporting only once every two weeks is crazy.
But what you're also missing is that this will happen again, because some way will be found to make it happen again. They can ban securitization of loans, tighten up reserve enforcement, etc., etc. Some way will be found around all of it, and the party will start all over again.
Read A Nation of Counterfeiters, by Stephen Mihm. Prior to the Civil War, the US had no recognized national currency, believe it or not. At that time, private banks issued money against their reserves of gold and silver. The situation that wound up existing was - what else? - an unlimited money supply. This book is about that time.
So now we have a single national currency, and a single enforcer of the money supply: the Fed. But what did you wind up with in the recent boom? A de facto unlimited money supply.

Conclusion: a way will always be found. It was found when there was a gold standard, it was found again in the Twenties under a slightly looser gold standard, and it was found again in this boom under a fiat currency regime with regulations put in place specifically to prevent the Twenties happening again.
Instability is inherent in capitalism.
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Old Feb 28, 2010, 4:34am   #517
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

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Originally Posted by N Rothschild View Post
whats worse is RBS is almost totally owned by the tax payer!
Technically the shareholders own the bank.

Tax payers only own the debt...
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Old Feb 28, 2010, 10:07am   #518
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

A bit like new aircraft - amazingly good while the computers function properly but one glitch and its all over.
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Old Feb 28, 2010, 3:13pm   #519
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

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Originally Posted by Benton D Struckcheon View Post
Obviously there is an official reserve ratio, set by the Fed. Without even getting into anything else, it should be obvious that if you can securitize a loan and sell it off, this frees you to make more loans. This is an international, not just a US, practice. Therefore, throughout the world, reserve ratios are flouted regularly in good times, when people are willing to buy the securities offered by the banks.
In bad times, the multiplier exists only because the whole thing goes into reverse: as loans are defaulted on, asset prices deflate, more loans get defaulted on because of the lower asset prices, more people default, and so on.
Just to give a quick example of this in action: the lousy economy is causing one of my neighbors, who owns his own business, to possibly have his house foreclosed. He's in at least the second wave of defaults, not the first. He was considered a worthy borrower when times were good, and he was. Now he's not anymore. There are lots of people in this position.

Lehman: Lehman was an investment bank. Investment banks were not regulated by the Fed.
AIG was an insurance company, and they were up to their eyeballs in this as well. Also, not regulated by the Fed.

As for enforcement, I don't know how it's done in other countries. I suspect culture plays as strong a role as official action. As far as official action, the moment I found out the bank only had to report its reserve position once every two weeks I knew it was a fiction. Obviously, especially in this time of instant electronic transactions, reporting only once every two weeks is crazy.
But what you're also missing is that this will happen again, because some way will be found to make it happen again. They can ban securitization of loans, tighten up reserve enforcement, etc., etc. Some way will be found around all of it, and the party will start all over again.
Read A Nation of Counterfeiters, by Stephen Mihm. Prior to the Civil War, the US had no recognized national currency, believe it or not. At that time, private banks issued money against their reserves of gold and silver. The situation that wound up existing was - what else? - an unlimited money supply. This book is about that time.
So now we have a single national currency, and a single enforcer of the money supply: the Fed. But what did you wind up with in the recent boom? A de facto unlimited money supply.

Conclusion: a way will always be found. It was found when there was a gold standard, it was found again in the Twenties under a slightly looser gold standard, and it was found again in this boom under a fiat currency regime with regulations put in place specifically to prevent the Twenties happening again.
Instability is inherent in capitalism.

I agree with pretty much everything you have written here BDS and I recognise a little like the joke between two friends attacked by a bear. One stops to put his trainers on so he can out run his friend and avoid being the next meal.

In a competitive world the US and many others are perhaps the worst offenders of the system. US far more important as it is the key power player with global standard currency. BUT - there are a number of other countries who have pursued the same system and policies but have not flouted the rules. Now this may either be because their unit of currency is not the standard like the dollar or because they are better mananged, regulated etc. It could be they were simply just lucky being too small and off the radar. I reckon taking these later arguements loses sight of the reasons for the current fiasco or worse underplays them.

Either way these countries which have now been exposed and all individuals and financial institutions can judge for them selves what level of risk and exposure they are prepared to consume.

The net conclusion to all this debt you suggest is deflation or negative multiplier etc.

But imo that ignores the duality of the economy once again that one persons expenditure is another persons income. One persons debt is someone elses credit. Yes - even if that money was created out of smoke. Because the governments have stepped in - true asset valuations have not taken place and those asset valuations via wealth and spending will feed into the real economy sooner or later.

Current US inflation stats ignored food prices... Here is an old article and I would suggest more of this will be coming round as economies come to grips and moving out of recession... http://www.msnbc.msn.com/id/24127314/

Food and fuel prices are at this level in a recession how will prices cope in boom times??? Higher prices, higher interest rates and higher inflation... Unavoidable!
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Old Mar 6, 2010, 5:08am   #520
 
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Re: Could the Weimar Hyperinflation Happen Again in America?

More on bankers, British variety, which I suppose you can file under "Old Habits Die Hard": It'll Go Faster Than You Think
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