Macro-Economics
How money is created as a debt by private banks
“The Money Myth Exploded” was one of the first articles of Louis Even, and to this date it remains one of the most popular illustrated story to explain in layman’s language how money was and still is created by private banks as a debt.
1. Shipwreck survivors
An explosion had blown their ship apart. Each one grasped the first bit of wreckage that came to hand. And when it was over, there were five left, five huddled on a raft which the waves carried along at their will. As for the other victims of the disaster, there was no sign of them.
Hour after long hour their eyes searched the horizon. Would some passing ship sight them? Would their make-shift raft finds its way to some friendly shore?
Suddenly a cry rang out: “Land! Look! Over there, in the direction the waves are carrying us!”
And as the vague silhouette proved itself to be, in fact, the outline of a shore, the figures on the raft danced with joy.
They were five. There was Frank, the carpenter, big and energetic. It was he who had first cried, “Land!”.
Then Paul, a farmer. You can see him, front and left in the picture, on his knees, one hand against the floor, the other gripping the mast of the raft.
Next is Jim, an animal breeder; he’s the one in the striped pants, kneeling and gazing in the direction of land.
Then there is Harry, an agriculturist, a little on the stout side, seated on a trunk salvaged from the wreck.
And finally Tom, a prospector and a mineralogist; he is the merry fellow standing in the rear of the picture with his hand on the carpenter’s shoulder.
2. A providential island
To our five men, setting foot on land was like returning to life from the grave.
When they had dried and warmed themselves their first impulse was to explore this little island on to which they had been cast, far from civilization.
A quick survey was sufficient to raise their spirit. The island was not a barren rock. True enough, they were the only men on it at the moment. But judging from the herds of semi-domesticated animals they encountered, there must have been men here at some time before them. Jim, the animal breeder, was sure he could completely domesticate them and put them to good service.
Paul found the island’s soil, for the most part, to be quite suitable for cultivation.
Harry discovered some fruit trees which, if properly tended, would give good harvests.
Most important were the large stands of timber embracing many types of wood. Frank, without too much difficulty, would be able to build houses for the little community.
As for Tom, the prospector, well, the rock formations of the island showed signs of rich mineral deposits. Lacking the tools, Tom still felt his ingenuity and initiative could produce metals from the ores.
So each could serve the common good with his special talent. All agreed to call the place Salvation Island. All gave thanks to Providence for the reasonably happy ending to what could have been stark tragedy.
Japan’s central bank cuts key interest rate to 0.1 percent
Is the world heading toward a zero rate policy? This question is being asked by hundreds of economists and businessmen. As evidence of deep recession is unfolding, bankers and economists are predicting that UK interest rates can hit zero any time now. The Bank of Japan’s decision to lower its key policy rate to 0.10 percent from 0.30 percent followed by US Federal Reserve Bank’s dramatic move is more proof to that fact that world is heading toward a global flat zero interest rate.
The Bank of Japan’s policy board voted 7-1 to cut the uncollateralized overnight call rate target from 0.3 percent. It was the second cut in less than two months. Japan’s interest rates have gone lower — they were effectively at zero from 2001 to 2006. TOMOKO A. HOSAKA of AFP reports
“The BOJ is in a similar situation to the Fed — the policy rate is down to a critical point, and policy conduct will inevitably shift to full-blooded quantitative easing,” said Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs.
Fed Cuts Short-Term Rates to Nearly Zero
The United States Federal Reserve says it will use “all available tools” to restart economic growth. The central bank’s main interest rate is now the lowest in its history. This week the Fed cut its target rate of one percent for overnight loans between banks to a target range of zero to one-fourth of one percent. The Fed based its decision on weakening economic conditions.
Federal Reserve in Washington
Americans have decreased their spending every month since July — the longest period in at least sixteen years. Unemployment grew to six and seven-tenths percent in November — the highest in fifteen years.
This week’s cut in the federal funds rate was larger than many economists had expected. The Fed also cut its rate for direct loans to banks. And it began paying interest on balances held in the Federal Reserve System.
In the past, cutting rates has been a powerful tool to lift the economy. But President-elect Barack Obama says it is not enough this time.
BARACK OBAMA: “We’re running out of traditional ammunition that’s used in a recession, which is to lower interest rates. They’re getting to be as low as they can go.”
Bail-out in your favour, Go Directly to Congress
Our economy has been all over the news lately. Whether it be Fannie Mae and Freddie Mac, AIG or the Lehman Brothers, we seem to be in a financial world of hurt. This led us to wonder, how would the economy affect America’s favorite board game, Monopoly?
Foreclosure has hit the economy hard, so hard in fact that it has taken its toll on America’s favorite board game . . .
The Reasons Behind Global Economic Crisis
It is now fairly established that the recent crisis in US sub-prime housing market is the primary reason behind the global economic melt-down. In order to fully understand the dynamics and depth of current global recession, It is very important to know what led us to this crisis. I have found the illustration below very thought-provoking and useful. It helped me explain the reasons effectively.
The visual guide to the financial crisis:
We all know, Alan Greenspan and Bush said they are sorry for the Global economic crisis. But do you know what Greenspan said in 2003?
“The notion of bubble bursting and the whole price level coming down seems to me as far as a national nationwide phenomenon, is really quite unlikely,” By Alan Greenspan, Federal Reserve Chairman, in 2003.
Economic & Political Systems Explained
FEUDALISM: You have two cows. Your lord takes some of the milk.
PURE SOCIALISM: You have two cows. The government takes them and puts them in a barn with everyone else’s cows. You have to take care of all of the cows. The government gives you as much milk as you need.
BUREAUCRATIC SOCIALISM: You have two cows. The government takes them and put them in a barn with everyone else’s cows. They are cared for by ex-chicken farmers. You have to take care of the chickens the government took from the chicken farmers. The government gives you as much milk and eggs as the regulations say you need.
FASCISM: You have two cows. The government takes both, hires you to take care of them and sells you the milk.
PURE COMMUNISM: You have two cows. Your neighbors help you take care of them, and you all share the milk.
RUSSIAN COMMUNISM: You have two cows. You have to take care of them, but the government takes all the milk.
CAMBODIAN COMMUNISM: You have two cows. The government takes both of them and shoots you.
DICTATORSHIP: You have two cows. The government takes both and drafts you.
PURE DEMOCRACY: You have two cows. Your neighbors decide who gets the milk.
REPRESENTATIVE DEMOCRACY: You have two cows. Your neighbors pick someone to tell you who gets the milk.
BUREAUCRACY: You have two cows. At first the government regulates what you can feed them and when you can milk them. Then it pays you not to milk them. Then it takes both, shoots one, milks the other and pours the milk down the drain. Then it requires you to fill out forms accounting for the missing cows.
PURE ANARCHY: You have two cows. Either you sell the milk at a fair price or your neighbors try to take the cows and kill you.
CAPITALISM: You have two cows. You sell one and buy a bull.
SURREALISM: You have two giraffes. The government requires you to take harmonica lessons.
(source of information is unknown)
Fed Cuts Rates by 50 Basis Points: Can It Go Below One Percent
Moments Ago Fed Funds Rate was cut to down to 1.00% bringing it down 50 basis points. It was expected as 25 basis was too low and 75 basis points were thought as too high.
This new kind of pushed Fed into corner. It is running out of Monetary options. few fiscal tools are left. It is very unlikely that Fed will lower the rates below One Percent. but some sources says that this option is still on tables. we did an article on Zero interest rate a few days back.
We at FLR don’t think that Fed cutting rate will ease the credit market. The current problem is about stinking balance sheets. Govt Bail outs Or Easy Credit from Fed can not do any thing but to inflate them by putting either equity or credit on these balance sheets. It does not take away the stink from the balance sheet. The problem with liquidity of commercial paper will not be solved unless all those toxic assets like sub prime credit are removed from them.
DOW and S&P 500 took a dip after rate cut. and 10 year bond yields rallied upwards….. watch Bloomberg for more details.
New Economic Reality Changes Financial Language
New economic realities brings its own dictionary. Your Money Mogul listed new meanings of old financial terms. Forget the losses you made and enjoy yourself.
CEO — Chief Embezzlement Officer.
CFO — Corporate Fraud Officer.
BULL MARKET — A random market movement causing an investor to mistake himself for a financial genius.
BEAR MARKET — A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.
VALUE INVESTING — The art of buying low and selling lower.
P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.
BROKER — What my broker has made me.
STANDARD & POOR — Your life in a nutshell.
Best Commentary on Global Economic Crisis
Below is by far the best commentary on global economic crisis. Imagine you get up one morning and go to bookstall and find “The Economist” on display like this.
10 Reasons: Why Fed Should adopt Zero Interest Rate Policy?
As news continues to pour in that Fed Rates are likely to go near or at zero interest rate level, we think that Fed. should get out of its stunned posture and take more drastic measures like bringing the rates down to zero percent levels. These are indeed difficult times and magnanimity of problems require Fed. to take magnanimous steps. It should act fast and give the economy the much needed fiscal jolt. Unfortunately, Fed has a history of doing too little and too late.
After detailed analysis of issue and reading the material suggested below, we have come to conclusion that there was never before a time, so good ,for adopting zero interest rate policy. we put forth our set of 10 reasons why Fed. should go for it.
- Zero interest rate will encourage investment throughout the economy.
- Zero interest rate will make capital purchases financially more attractive.
- Zero interest rates will encourage people to Invest rather than Lend.
- It will create more jobs as people will make investments in securities or real plant and equipment.
- Zero interest rates are expected to take gas out of Commodities and Gold.
- Probably it is the best tool to get out of depression. (We used it in 1930’s)
- Liquidity trap is just a theoretical construct, not an actual phenomenon.
- Remove the burden on tax payers to bailout banks and stock markets.
- Bank of Japan has successfully used this model for decades to support Its Fiscal System.
- Fed can adopt “Non-Standard” fiscal measures to stimulate growth.
Further Reading and References(open in new window)
- http://en.wikipedia.org/wiki/Zero_interest_rate_policy
- http://economics.about.com/cs/interestrates/a/zero_interest.htm
- http://www.imf.org/external/pubs/cat/longres.cfm?sk=15474.0
- http://www.financialstandard.com.au/news/view/24185/
- http://www.mmhabits.com/what-if-the-fed-cuts-to-0-the-zero-interest-rate-policy/
- http://en.wikipedia.org/wiki/Liquidity_trap
