Mish “Hard Money” Goes Off The Rails
by ilene - October 6th, 2009 1:26 pm
Here’s another installment in the debate between our friends Mish (Global Economic Trend Analysis) and Karl (The Market Ticker). Confession – as a big fan of both Mish and Karl, each makes good arguments, I’m currently undecided. What do you think? Don’t forget, we have a comment section. 
Ilene
Mish "Hard Money" Goes Off The Rails
Courtesy of Karl Denninger at The Market Ticker
I am occasionally stunned when someone who I thought had a good grasp of reality and reason goes entirely off into left field, powered by a thesis that has run out of track.
Mish, unfortunately, has succumbed to this sin in his piece "Fractional Reserve Lending Constitutes Fraud"
He alleges (after waving his arms around):
Fractional Reserve Lending constitutes fraud. The case is irrefutable.
Bluntly: Bullshit.
Let us distinguish between two separate items: Money and Credit.
We shall first define them:
- Money: The product of either growing something, mining something or manufacturing something. "Money" is actual wealth, and comes into being only through creation. Ultimately, all money is traced to the only "free lunch" that exists in this solar system, that is, the power of The Sun, although in many cases (e.g. mining) the activity is in fact discovery of previously-created wealth (by the actions of The Sun) levered through human endeavor.
- Credit: The granting of purchasing power predicated upon a future promise to pay with money.
Mish’s (and others) claim that "all fractional lending is fraudulent" implies that one cannot pledge money to secure credit.
That’s obvious BS; let’s put forward a concrete example.
I walk into the forest (grow) and cut down trees (mine) which I then process into lumber (manufacture.) I dig up some iron ore (mine) and turn it into steel nails (manufacture.) With these two items I now construct a house (manufacture.)
That house (and all the products that I used to make it) are in fact money. They were the product of mining, growing, and/or manufacturing. Each of these acts is in fact the creation of money.
That house, has a representation of money in its utility value. That is, the shelter value that it has for a group of humans – it provides a place to eat, sleep, take a dump and
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Fractional Reserve Lending Constitutes Fraud
by ilene - October 6th, 2009 12:17 pm
Fractional Reserve Lending Constitutes Fraud
Courtesy of Mish
Here goes: Denninger does not phrase my arguments correctly on points 2-5, however he thinks they are immaterial so the points are somewhat moot. The crux of the matter is not whether assets are backed by collateral as Denninger suggests, but rather whether the same money has been lent out multiple times.
Let’s follow through with a real life example.
Fannie Mae makes a loan of $1,000,000. Let’s be more than reasonably fair and assume Fannie Mae issued bonds for the entire amount, not borrowing a single cent into existence. So far there is no fraud.
$1,000,000 goes to the home builder. That home builder deposits $1,000,000 into a Bank of America checking account. Ignoring sweeps that would allow Bank of America to loan out every cent, let’s assume BofA keeps 10% in reserves and lends out $900,000 to a new furniture store on the corner strip mall.
The furniture store owner buys $900,000 of furniture from a wholesaler. The wholesaler deposits $900,000 into a Citigroup checking account. Again, ignoring the likelihood Citigroup sweeps the whole amount into a savings account thereby able to lend out the entire amount (savings accounts have no reserve requirements), let’s assume that Citigroup keeps 10% in reserves and lends out $810,000 to a High Roller who takes out a home equity loan on his house that is supposedly worth $3,000,000.
High Roller buys a yacht from a boating manufacturer for $810,000. The yacht manufacturer deposits $810,000 in a checking account at Wells Fargo. Following the same pattern, Wells Fargo keeps 10% in reserves and lends out $729,000 to a plumbing supply company, because home sales are going gangbusters and the plumbing supplier needs more supplies.
I think you can see where this is headed.
On the original $1,000,000 this is what FRL allows to be lent out.
$900,000
$810,000
$729,000
$656,000
$590,000
$531,000
$478,000
$430,000
$387,000
….
See where this is going?
I am going to arbitrarily stop the chain right there, but the total so far is $5,511,000 out of $1,000,000 was lent out.
Karl claims this is not fraudulent because "it’s all backed by assets".
Well for starters the value of those assets backing
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Rebuttal To Mish: FRL
by ilene - October 6th, 2009 12:08 pm
Rebuttal To Mish: FRL
Courtesy of Karl Denninger at The Market Ticker
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Global Debt Bubble, Causes and Solutions
by ilene - August 24th, 2009 4:01 pm
Global Debt Bubble, Causes and Solutions
Courtesy of Mish
Australian economist Steve Keen is one of the very few who have called this economic crisis correctly. What distinguishes Keen is that his economic forecasts are based on levels of debt and changes in levels of debt as opposed to money supply, output capacity and other things that led most economists astray.
The following video is about 19 minutes long but very much worth listening to in entirety, improving as it goes along. The video may take a while to load but it’s well worth it. Everything below in quotes, until the next bold title is a partial transcript from the video.
Steve Keen:
"If you have a sane economy, and by sane economy I mean one which is not addicted to debt, not a Ponzi economy, then the change in debt each year should contribute a minor amount to demand. Therefore, if you tried to correlate debt to the level of unemployment you would not find much of a correlation. Unfortunately that is not the economy we live in."
"The red line shows the percent contribution that debt contributes to demand and the blue line which is inverted is the unemployment rate."
"There should be no correlation if the economy is operating sensibly. Correlation is now at the level of 83%. Because we have a debt driven economy, the change in debt levels each year is the major determinant in the change in economic performance."
"Neoclassical economic theory is dangerous. Neoclassical economists completely missed this crisis. My favorite statement comes from the OECD in its June 2007 report"
" A recent survey trying to find economists who predicted this found 12. And there are 10,000-15,000 economists in the US alone which is why I don’t particularly accept their assurances that everything is OK from now on."
"Now why are economists so ignorant? Two major reasons. First of all the type of modeling they do is static where you ignore time, or if you have dynamics you assume they are converging to some nice stable situation in the future. And they ignore almost completely the role of credit and debt."
"I probably win the Dr. Doom award around the planet these days now that Nouriel Roubini is expecting the recession will end in about 6 months time. I…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.