You are spot on here. My buddy works for a Capital Equipment engineering/sales company and there seems to be no end to the amount of orders he receives (which aren't many) that are turned down by the bank and the deal falls through. These are businesses that want to add or replace a food manufacturing line or equipment and they can't do it because the banks aren't willing to take the risk. So yes, it's a matter of banks not lending and consumers not borrowing. The money is making it to the hub but it isn't reaching the runway. Their line of credit is still open and being tapped frequently, unfortunately. Their receivables are way late so the company is on the brink....
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M1 money multiplier below 1
- Thread starter MrDODGE
- Start date
At the risk of stating the obvious, your knowledge on this topic far exceeds mine but it seems to me that all Bernanke did was post-pone or perhaps soften the degree of the depression we are trending towards. The key is going to be the states. The Feds can print as long as there is moderate interest in Treasury Auctions but states must borrow and borrow more to run operations. When the states fail the country will begin to fail. Programs such as Medicaid and Food Stamps are going to be slashed. Bus schedules will be trimmed (this is already happening where I live). Look out when farmer subsidies have to be reduced. Keep an eye on Cali, Nevada, and Illinois. More will follow.
Quote from Ed Breen:
The game gets tough to keep playin if the Treasury auctions begin to fail. Biggest problem for the Fed is that excess government debt, including state and municipal debt, will go into accute crises if interest rates rise and at same time Fed promises to restrain inflation with interest rate rise and at same time failure to restrain inflation will precipitate interest rate rise. You are right that it is not all up to Fed.; clearly we are at a point where monetary policy cannot solve our problems. Worse problem is that President and Congress are harming growth prospects with one off spending programs that are actually making the problem worse and reducing the Feds options. I personally think we will face social unrest as severe austerity programs are forced into policy; becuase revenues will drop even if tax rates are raised and the cost of debt will rise. This will force choices between paying debt service or maintaining basic services. We will see dramatic municipal and sovereign bankruptcies and reorganizations that don't make anyone happy and that will make it even more difficult to create a context for growth that is the only real solution.
Quote from krazykarl:
Gold is money. Oil is money. Time is money. (quite literally) Anything I am willing to accept in trade for services or goods is money.
Some money is more abundant and easily created than other money, no?
And when you pay the IRS, do you have a choice in paying them in gold, time or oil?
This is true but does this work in advanced economies? No, but that doesn't mean we won't go back to a barter system and trade sweaters for bread someday. Money is debt until further notice.
Quote from krazykarl:
You're talking about reserve notes, not money. Money is what a reserve note is, not the other way around.
Gold is money. Oil is money. Time is money. (quite literally) Anything I am willing to accept in trade for services or goods is money.
Karl, I think you make a distinction without a difference...its a unit of account accepted in commerce for trade...but cash is quite literally the non interest bearing debt of the U.S. Government. It is a note that promises an exchange of a unit of value over time...clearly a promise often broken.
The1, understand that debt origination depends on underwriting an abilit to pay over time and a guarantee lien on some marketable collateral. When the credit markets collapsed in 2007 and 2008 that changed the terms of the value of collateral and the estimation of future earnings streams. Value (all 'wealth' for that matter) is simply the present value of the right to possess a future income stream. As we change our expectations about the future we change not only the discount rate we use to calculate present value but we also change our confidence with respect to the certainty of the right to the future income. Stated differently, since the credit collapse we don't expect future earning to be as large or as certain as we did before the collapse. What this means is that now banks will lend you money at historically attractive rates but they will not give you the same coverage ratios for the debt. In the past they may have loaned 85% of the demonstrated ability to debt service...now they they will only loan 65%. So, now the collateral that is availble for debt, say a mortgage on plant real estate to support a business loan, which used to be valued at 1M in 2007, which would have supported a small business loat of $850,000, now will only appraise at $800,000 and banks will only loan 65% of that, so it will now support a small business loan of $550,000. So, even where the loan will underwrite at current standards the amount may not be sufficient for the business purpose...especially if the purpose is to pay off pre 2009 debt.
The1, understand that debt origination depends on underwriting an abilit to pay over time and a guarantee lien on some marketable collateral. When the credit markets collapsed in 2007 and 2008 that changed the terms of the value of collateral and the estimation of future earnings streams. Value (all 'wealth' for that matter) is simply the present value of the right to possess a future income stream. As we change our expectations about the future we change not only the discount rate we use to calculate present value but we also change our confidence with respect to the certainty of the right to the future income. Stated differently, since the credit collapse we don't expect future earning to be as large or as certain as we did before the collapse. What this means is that now banks will lend you money at historically attractive rates but they will not give you the same coverage ratios for the debt. In the past they may have loaned 85% of the demonstrated ability to debt service...now they they will only loan 65%. So, now the collateral that is availble for debt, say a mortgage on plant real estate to support a business loan, which used to be valued at 1M in 2007, which would have supported a small business loat of $850,000, now will only appraise at $800,000 and banks will only loan 65% of that, so it will now support a small business loan of $550,000. So, even where the loan will underwrite at current standards the amount may not be sufficient for the business purpose...especially if the purpose is to pay off pre 2009 debt.
Agree! Ed Breen has made quite a contribution to ET. One of the better threads I've seen in a long time.
Ed, if you don't mind me asking, what is your background? Are you an economics professional?
Ed, if you don't mind me asking, what is your background? Are you an economics professional?
Quote from rcj:
Damn...!!! class is in session!
"Value (all 'wealth' for that matter) is simply the present value of the right to possess a future income stream. "
The1, no I am not an economics professional. In my career I was a director of an Economic Consulting Firm that was run by my good friend, now deceased, Jude Wanniski. I benefit from having had a lot of drinks with economic think tank guys and showing them how someone who runs a business really thinks.
I have also been a director and founder of a publicly listed Bank, which I founded. I was the president of a real estate development company that went out of business in the S&L collapse. I worked on acquiring and liquidating RTC portfolios in the aftermath the S&L collapse. I was a venture and managing partner of several retail ventures and a restaurant venture. I am a licensed lawyer and I once practiced commercial litigation. Presently I am an active director of an international manufacturing business.
Nonetheless, economics has been a passion and study of mine all my life. I try to use my real experience, sitting on a loan committee, an investment committee, dealing with politicians, making entrepreneural decsions and investments, doing tax planning as part of business decisions and so on, to inform, engage and temper economic theory. Through this perspective I realize that you cannot understand economics without under standing the practice of real world finance and the entrepreneural experience. Academic economists who have not studied finance or run a business are at a huge disadvantage in understanding how and why theory actually becomes practice, or not.
I have also been a director and founder of a publicly listed Bank, which I founded. I was the president of a real estate development company that went out of business in the S&L collapse. I worked on acquiring and liquidating RTC portfolios in the aftermath the S&L collapse. I was a venture and managing partner of several retail ventures and a restaurant venture. I am a licensed lawyer and I once practiced commercial litigation. Presently I am an active director of an international manufacturing business.
Nonetheless, economics has been a passion and study of mine all my life. I try to use my real experience, sitting on a loan committee, an investment committee, dealing with politicians, making entrepreneural decsions and investments, doing tax planning as part of business decisions and so on, to inform, engage and temper economic theory. Through this perspective I realize that you cannot understand economics without under standing the practice of real world finance and the entrepreneural experience. Academic economists who have not studied finance or run a business are at a huge disadvantage in understanding how and why theory actually becomes practice, or not.
That's quite an interesting background. Thanks for sharing your knowledge.
Quote from Ed Breen:
The1, no I am not an economics professional. In my career I was a director of an Economic Consulting Firm that was run by my good friend, now deceased, Jude Wanniski. I benefit from having had a lot of drinks with economic think tank guys and showing them how someone who runs a business really thinks.
I have also been a director and founder of a publicly listed Bank, which I founded. I was the president of a real estate development company that went out of business in the S&L collapse. I worked on acquiring and liquidating RTC portfolios in the aftermath the S&L collapse. I was a venture and managing partner of several retail ventures and a restaurant venture. I am a licensed lawyer and I once practiced commercial litigation. Presently I am an active director of an international manufacturing business.
Nonetheless, economics has been a passion and study of mine all my life. I try to use my real experience, sitting on a loan committee, an investment committee, dealing with politicians, making entrepreneural decsions and investments, doing tax planning as part of business decisions and so on, to inform, engage and temper economic theory. Through this perspective I realize that you cannot understand economics without under standing the practice of real world finance and the entrepreneural experience. Academic economists who have not studied finance or run a business are at a huge disadvantage in understanding how and why theory actually becomes practice, or not.
This argument never made any sense to me... So what if it says 'Note' on it? A quarter doesn't say 'Note' on it. Does that imply that that the debt-like qualities of a quarter are different to those of a dollar bill?Quote from Ed Breen:
Karl, what do you think 'money' is? Did you ever open your wallet and look at the cash? You will see that right on the top of each piece of linnen it says, "Federal Reserve Note." If this is not tradeable non interest bearing demand debt, then what is it?
Currency is a medium of exchange. What makes a dollar bill so different to a gold/silver coin or a tulip bulb or a seashell, making it into debt in the process?