Crisis in the Financial Markets

[GratefulCitizen]

Originally Posted by steel71

According to our Constitution, only gold and silver should be used as legal tender. That doesn’t mean we have to use metal for exchange, but the certificates/ notes/ paper money has to be backed by gold and silver, not fiat creations backed by nothing.

From Article I, Section 10. of the Constitution:

No State shall...make any Thing but gold and silver Coin a Tender in Payment of Debts;

The restriction is on the States, not on the Congress.

[Razor]

Originally Posted by steel71

Please don't take this as disrespectful but your understanding of the gold standard is unfortunately lacking in Constitutional and monetary history. According to our Constitution, only gold and silver should be used as legal tender. That doesn’t mean we have to use metal for exchange, but the certificates/ notes/ paper money has to be backed by gold and silver, not fiat creations backed by nothing. We did have a “gold” standard until 1971, since then it’s been fiat currency.

I don't take your post as disrespectful at all, but rather as remarkably (and incorrectly) presumptive. You may be surprised to learn that I actually do understand the difference between specie and fiat monetary systems, and that I did not take Mr. Paul to be advocating a specie-based currency rather than a gold-backed exchange system.

For all intents and purposes, the international gold standard system ended shortly after WWI when Britain's war debt forced the government to liquidate a large percentage of its gold assets, prompting other international powers (France, Russia) to end their paper-for-gold exchange policies in order to prevent a run on their respective national gold supplies. It ended in the US in 1933 when FDR outlawed the private ownership of gold and unilaterally raised the price of an ounce of gold from $20 to $35, where it remained until 1971 when Nixon ended the portion of the Bretton Woods/IMF agreement that allowed holders of US dollars to redeem them for gold.

Take a wild guess when our federal debt started to skyrocket?

I suppose the answer depends on how you interpret 'skyrocket'. According to my International Business text from last term, from 1958 to 1971, the US trade deficit increased by $56 billion, its gold reserve shrank from $24 billion to $12 billion, and its liabilities to foreign central banks rose from $13 to $62 billion. By 1971--the year you set as the beginning of our skyrocketing national debt--the US only held 22 cents of actual gold per US dollar. I'm no economist, but it appears to me that the US faced significant balance of payments deficits decades prior to 1971.

Ron Paul has written extensively over the last 25 years about economic and monetary policy. No other politician can match his knowledge and intelligence of the subject. He schools Alan Greenspan and Ben Bernanke, and makes them out to be a bunch bumbling idiots squirming in their seats.

You don't earn points on this board through extravagant use of hyperbole, in case you weren't aware.

While the simplicity of the gold standard theory may seem appealing on its surface, its many flaws (e.g., a government's inability to adjust its money supply, the system's reliance on the rate of mining to determine the price of gold, its deflationary bias, and its very low actual supply vs. global economy ratio) outweigh its single advantage over free-float currencies. Then again, that's based on my opinion, which lacks a basis in monetary history, right?

[nmap]

In the event anyone wishes to read the draft - 106 pages of it - it is available at: LINK

[GratefulCitizen]

Originally Posted by nmap

In the event anyone wishes to read the draft - 106 pages of it - it is available at: LINK

Section 128 changes an effective date for something in the Financial Services Regulatory Relief Act of 2006.
(from 10/1/2011 to 10/1/2008--Wednesday)

Section 202 of the (2006 Relief) Act reads:

SEC. 202. INCREASED FLEXIBILITY FOR THE FEDERAL RESERVE BOARD TO ESTABLISH RESERVE REQUIREMENTS.
Section 19(b)(2)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(2)(A)) is amended--
(1) in clause (i), by striking `the ratio of 3 per centum' and inserting `a ratio of not greater than 3 percent (and which may be zero)'; and
(2) in clause (ii), by striking `and not less than 8 per centum,' and inserting `(and which may be zero),'.

(emphasis mine)

Does this mean what it looks like?

[nmap]

Originally Posted by GratefulCitizen

Does this mean what it looks like?

It means exactly what you think it does.

Relax the reserve requirements so the banks can generate profits and quietly recover. If the economy improves, it will work - it will be a clever move. Ahh, but if the economy worsens, this will constitute a dangerous increase in the risk exposure of the banking system.

I believe that gamblers use the term "double or nothing".

[Surf n Turf]

Originally Posted by nmap

The suspension of mark-to-market rules lets banks, brokerages, and insurance companies continue to operate even though their capital requirements may be less than the regulatory minimums. Taking the information at face value, it might be possible for companies with negative net worth to continue to function. This represents a gamble.

If:
the economy improves,
and affected business begin turning a profit,
and the troubled debt stabilizes or appreciates,
Then the provision permits the affected companies to return to viability with no cost to the taxpayers.


The gamble is that the situation does not improve. In that case, the cost of the guarantees could be some arbitrarily large number that would exceed our national ability to pay. It could be in the trillions of dollars. Factor in the crossover of Social Security in 2017(when employment tax revenues received do not cover payments out), and one gets the possibility of a difficult problem.

.

Nmap,
Doesn’t the Federal Government have suspend the mark to market rules and lower capital requirements, and to assume that the economy will improve, business will return to profitability and that stabilization in the markets will occur – else “one gets the possibility of a difficult problem” as we cannot monetarise 4x Trillions of dollars, when we have 1 ½ x trillion in circulation.
That is not monetarising the debt, that is insolvency --- even if we own the printing presses

SnT

Originally Posted by nmap

It means exactly what you think it does.


I believe that gamblers use the term "double or nothing".

Sorry,
Looks like you just answered my questions to Grateful Citizen ---

SnT

[nmap]

Originally Posted by Surf n Turf

Nmap,
Doesn’t the Federal Government have suspend the mark to market rules and lower capital requirements, and to assume that the economy will improve, business will return to profitability and that stabilization in the markets will occur – else “one gets the possibility of a difficult problem” as we cannot monetarise 4x Trillions of dollars, when we have 1 ½ x trillion in circulation.
That is not monetarising the debt, that is insolvency --- even if we own the printing presses

SnT

The problem is even larger than you've mentioned. There are $ 62 Trillion dollars worth of Credit default swaps (CDS) out - all unregulated. There are about (no one knows for sure) $250 Trillion dollars worth of derivatives. What happens if the underlying securities the CDS and other derivatives are based on fail? That's a rhetorical question, since, again, no one knows.

We had best hope for a good economy. The alternative may be uncomfortable.

[GratefulCitizen]

From the Federal Reserve Act (12 U.S.C. 461(b)(2)(A)):

(present version-- these limits potentially change to 0 on Wednesday)

(2)
(A) Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy—
(i) in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).

12 U.S.C. 461(b)(2)(B):

(B) Each depository institution shall maintain reserves against its nonpersonal time deposits in the ratio of 3 per centum, or in such other ratio not greater than 9 per centum and not less than zero per centum as the Board may prescribe by regulation solely for the purpose of implementing monetary policy.

(emphasis mine)

IIRC, m = 1/R, where m is the money multiplier and R is the reserve requirement.

The legal floor for reserve requirement may become 0.

So basically, if they want to, the Fed can expand the money supply infinitely.

Sounds like a recipe for some serious inflation.

A measure of wheat for a penny, and three measures of barley for a penny; and see thou hurt not the oil and the wine.

[Surf n Turf]

Originally Posted by nmap

The problem is even larger than you've mentioned. There are $ 62 Trillion dollars worth of Credit default swaps (CDS) out - all unregulated. There are about (no one knows for sure) $250 Trillion dollars worth of derivatives. What happens if the underlying securities the CDS and other derivatives are based on fail? That's a rhetorical question, since, again, no one knows.

We had best hope for a good economy. The alternative may be uncomfortable.

Originally Posted by GratefulCitizen

The legal floor for reserve requirement may become 0.

So basically, if they want to, the Fed can expand the money supply infinitely.

Sounds like a recipe for some serious inflation.

GratefulCitizen / nmap,
Inflation is indeed the “devil in the details” I am worried about.
nmap, your statement that "The alternative may be uncomfortable" is the most understated of the evening -- you do have a way with words.
But, I do not see the heavy monetary flow to precious metals (I am a gold / silver bug), which within range looks like a yo-yo. Silver futures last week at below $11, Gold at $777 then to $980.
Either someone is doing some heavy dumping or serious forward selling (unsecured hole in the ground) and presenting us with yet another problem where the underlying metal might not exist.
I was watching the Press session with the Dems on CSPAN, and they looked like the kid that raided the candy store. I have read the bill (earlier version), but can’t find anything they should be happy about – is ACORN back as a beneficiary ?Additionally, This bill is not over till the fat lady sings --- no one has voted on it yet.

Back to inflation –
Grateful Citizen to answer your question let’s look at Zimbabwe

Zimbabwe's inflation rate has soared in the past three months and is now at 11.2 million percent, the highest in the world, according to the country's Central Statistical Office. In February, the price of a loaf of bread in the country was less than 200,000 Zimbabwe dollars. On Monday, that same loaf of bread cost 1.6 trillion Zimbabwe dollars. Analysts have said the Zimbabwean government's official inflation rate figures are conservative. Last week, one of Zimbabwe's leading banks, Kingdom Bank, said the country's inflation rate was now more than 20 million percent. The locally-owned bank predicted tougher times ahead for Zimbabwe in the absence of donor support and foreign investment in an economy that has been in freefall for almost a decade

http://www.cnn.com/2008/BUSINESS/08/...tml?eref=onion

[frostfire]

nmap, I'm learning a lot from your posts and appreciate your taking the time/effort. Since the bail-out is almost a go, idea such as this one that I got this morning is nothing but daydream?
I don't necessarily agree with its execution, but is it feasible/plausible?

(I don't know who wrote it originally. All credits go to him/her)

This idea sounds just crazy enough to possibly work, so naturally it won't be given serious consideration. How great is our bureaucracy! !

I'm against the $85,000,000, 000.00 bailout of AIG.

Instead, I'm in favor of giving $85,000,000, 000 to America in a "We Deserve It Dividend".

To make the math simple, let's assume there are 200,000,000 bonafide U.S.
Citizens 18+.

Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up.

So divide 200 million adults 18+ into $85 billion that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a "We Deserve It Dividend".

Of course, it would NOT be tax free.

So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000, 000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife has $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

Repay college loans - what a great boost to new grads

Put away money for college - it'll be there

Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobs

Invest in the market - capital drives growth

Pay for your parent's medical insurance - health care improves

Enable Deadbeat Dads to come clean - or else


Remember, this is for every adult US Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it, instead of trickling out a puny $1000.00 ( "vote buy" ) economic incentive that is being proposed by one of our candidates for President...


If we're going to do an $85 billion bailout, let's bail out every adult US Citizen 18+!
As for AIG: - Liquidate it.

- Sell off its parts.

- Let American General go back to being American General.

- Sell off the real estate.

- Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't!

Sure, it's a crazy idea that can "never work."

But can you imagine the Coast-To-Coast Block Party?

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion.

"We Deserve It Dividend" more than I do the geniuses at AIG or in Washington DC

And remember, the plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh... I feel so much better getting that off my chest.
Oh, and one more thing let's do this before China buys up AIG and others and we have to learn a new language!

[nmap]

Frostfire, let's consider the calculations:

85,000,000,000/200,000,000

can be simplified to:

85,000/200

Which becomes:

850/2, or $425 per person.

To get the larger sum, the bailout would need to be $ 85 Trillion (with a T).

Thank you for the kind words...

[nmap]

Originally Posted by GratefulCitizen

Sounds like a recipe for some serious inflation.

A measure of wheat for a penny, and three measures of barley for a penny; and see thou hurt not the oil and the wine.

Of course. There are two ways that I can discern out of the current situation. We can buckle down, have an austere national budget, and cut back on both personal and public spending for a decade or so. Or, we can inflate. Since both politicians and the public seem to prefer short term paliatives, I suspect that you're right about inflation.

On your second point - I strongly suspect food products will increase in price. To that end, I've taken modest positions in DBC and DBA, which are commodity ETFs. DBC is a broad index, whereas DBA focuses on wheat, soybeans, corn, and sugar. The prospectus for each is HERE. Note: Before even considering these, one should read the prospectus. And they will complicate one's taxes, since they generate form K-1 on March 15th.

[nmap]

Originally Posted by Surf n Turf

GratefulCitizen / nmap,
Inflation is indeed the “devil in the details” I am worried about.
nmap, your statement that "The alternative may be uncomfortable" is the most understated of the evening -- you do have a way with words.
But, I do not see the heavy monetary flow to precious metals (I am a gold / silver bug), which within range looks like a yo-yo. Silver futures last week at below $11, Gold at $777 then to $980.
Either someone is doing some heavy dumping or serious forward selling (unsecured hole in the ground) and presenting us with yet another problem where the underlying metal might not exist.

The problem with describing an outcome is that the economy isn't monolithic. For an elderly widow with no savings and a meager Social Security income the outcome might be horrific. Likewise for a single parent with children, working multiple part-time jobs requiring long commutes. On the other hand, the top 1% of the households in the U.S. have a net worth of $6 Million or more - I suspect that inflation will be profitable for that segment of the population. So, is inflation "good" or "bad"? I guess I see it as a function of perspective.

I, too, like precious metals. One problem is that a mine which is marginal for $500 gold becomes highly profitable at $1,000 - so the supply is dynamic. In addition, one can go for a lifetime without owning an ounce of gold - thus, demand is elastic. I think it's best to use a long-term approach. Acquire precious metals or mining stocks (or, a mutual fund or ETF for the sector), and hold on for years and decades. In addition, consider the new commodity ETFs that I mentioned in the posting to Grateful. You might find DBC of particular interest, if only as a hedge against living expenses.

Originally Posted by Surf n Turf

I was watching the Press session with the Dems on CSPAN, and they looked like the kid that raided the candy store. I have read the bill (earlier version), but can’t find anything they should be happy about – is ACORN back as a beneficiary ?Additionally, This bill is not over till the fat lady sings --- no one has voted on it yet.

Back to inflation –
Grateful Citizen to answer your question let’s look at Zimbabwe

Zimbabwe's inflation rate has soared in the past three months and is now at 11.2 million percent, the highest in the world, according to the country's Central Statistical Office. In February, the price of a loaf of bread in the country was less than 200,000 Zimbabwe dollars. On Monday, that same loaf of bread cost 1.6 trillion Zimbabwe dollars. Analysts have said the Zimbabwean government's official inflation rate figures are conservative. Last week, one of Zimbabwe's leading banks, Kingdom Bank, said the country's inflation rate was now more than 20 million percent. The locally-owned bank predicted tougher times ahead for Zimbabwe in the absence of donor support and foreign investment in an economy that has been in freefall for almost a decade

http://www.cnn.com/2008/BUSINESS/08/...tml?eref=onion

I don't believe ACORN is in - but we have to remember that a very large honey pot has been created. Flies of every stripe are sure to pay it a visit.

I like your example of Zimbabwe. Interesting, is it not, that the society still functions after a fashion, despite the poorly managed economy. Inflation is a highly effective way to take purchasing power out of the hands of savers, while transferring it to the hands of debtors. Since governments are often debtors, there is a clear incentive.

Where this all becomes interesting is if some other event further distresses the economy. My personal bias is that it will be energy prices, although Grateful advances some good arguments that such events will be farther in the future (on another thread).

Interesting times.

[Razor]

Originally Posted by nmap

The problem with describing an outcome is that the economy isn't monolithic. For an elderly widow with no savings and a meager Social Security income the outcome might be horrific. Likewise for a single parent with children, working multiple part-time jobs requiring long commutes. On the other hand, the top 1% of the households in the U.S. have a net worth of $6 Million or more - I suspect that inflation will be profitable for that segment of the population. So, is inflation "good" or "bad"? I guess I see it as a function of perspective.

Seeing as how the top 1% pay the largest portion of taxes to support the govt, I don't have much issue with them receiving a proportionately larger benefit.

[nmap]

Originally Posted by Razor

Seeing as how the top 1% pay the largest portion of taxes to support the govt, I don't have much issue with them receiving a proportionately larger benefit.

Nor do I, Sir. The situation does, however, add weight to the dictum "get capital".