<<The money didn't disappear....it wasn't there to begin with.>>
William, your above comment directed towards friday's
DOW and Nasdaq reduction in "wealth" is a very good
introduction to some recent old news of the type
given at the Le Metropole Cafe in commentary format.
Most of us on this thread can run in circles chasing
each others posts in an attempt to capture what really
did happen so that we know where we are being taken.
For myself I will continue to parrot the GATA line
and hope that where they take me is a better place
than where I would take myself.
Time will tell. Doug
The Dos Passos Table, Discussion du Jour: Guest Speaker
Definitions of Money in Congress: Webster vs. Greenspan
By Reginald H. Howe
www.GoldenSextant.com
March 7, 2000
Daniel Webster addressed the subject of the nation's money
in a speech on the Specie Circular
delivered in the Senate on December 21, 1836:
... to a question by U.S. Rep. Ron Paul, R- Texas,
Federal Reserve Chairman Alan Greenspan spoke to the subject
of the nation's money in his Humphrey- Hawkins testimony
on February 17, 2000:
By definition, all prices are indeed the
'ratio of an exchange of a good for money.'
And what we seek is what that is.
Our problem is we used M-1 at one point as the proxy of money,
and it turned out to be a very difficult indicator of any financial state.
We then went to M-2 and had the similar problem.
We have never done M-3 per se because it largely reflects
the extent of expansion of the banking industry.
And when in effect banks expand, in and of itself,
it doesn't tell you terribly much about what real money is.
So our problem is not that we do not believe in sound money.
We do. We very much believe that,
if you have a debased currency,
that you will have a debased economy.
The difficulty is in defining what part
of our liquidity structure is truly money.....
Regrettably, none of those which we have been able to develop,
including MZM -- has done that.
That does not mean that we think that money is irrelevant.
It means we think our measures of money have been inadequate.
And, as a consequence of that, we,
as I have mentioned previously,
have downgraded the use of the monetary aggregates
for monetary policy purposes,
until we are able to find a more stable proxy
for what we believe is the underlying money in the economy."
Question by Dr. Paul:
"So it's hard to manage something you can't define?"
Answer by Mr. Greenspan:
"It is not possible to manage something you can't define."
What irony!
Daniel Webster, senator and speculator,
arguing for a flexible currency,
gives an irrebuttable defense of gold and silver
as the constitutionally mandated standard of value
and sole legal tender.
The monetary provisions of the Constitution have never changed.
What has changed are the interpretations that politicians
and judges put on them. The result is that the actual money
of the country has gone from a thing that could be easily defined
to a notion that defies all attempts at definition.
In the process,
the concept of a true standard of value has been lost,
and the distinction between money and credit has been obliterated.
The consequences are almost too fearful to contemplate.
... a full- blown currency crisis.
[End.]
The Hemingway Table
Discussion du Jour: US Financial Markets
Doug Nolan
David W. Tice & Associates
The Prudent Bear Fund
dcnoland@aol.com
April 7, 2000
Note: GSEs = Government Sponsored Enterprises
Capital Markets as Reckless Creators of Money and Credit
... very much like the work of Northern Trust's Paul Kasriel
and will highlight his recent writing,
"Do Government Sponsored Enterprises Create Credit?
No, Alan Does."
ntrs.com
as it does a nice job explaining the consensus view,
although we obviously disagree.
The thrust of our argument is that that GSE's,
money market funds, and capital markets
generally have come together to develop
into critical instigators of money and credit excess.
While some would like to believe
that the GSE's and other non-banks
do not create money or credit,
that they only provide a beneficial function
as "intermediary" between savings and investment,
this belies reality.
Instead, these often-aggressive institutions
are pivotal players in an historic bubble
that has virtually nothing to do
with efficiently allocating savings,
but everything to do with money and credit excess.
Indeed, through the capital markets,
unprecedented money and credit growth
has fueled an unprecedented financial and economic bubble.
Today's commentary will rehash some old "stuff",
while also hopefully shedding some new insight.....
So, one might ask,
why do we have a problem with this arrangement
of converting risky debt into money?
Well, we actually have a list of concerns,
but for this discussion there is a key aspect
of this seemingly wonderful alchemy
that needs to be highlighted: derivatives.
But first, one more point needs to be made.....
Conventional thinking has it that the GSEs
are simply intermediaries,
middlemen between those saving
and those wanting to borrow money.
As the thinking goes, the GSEs operate.....
... they simply "intermediate"
without creating additional credit, or buying power.
As logical as analysis is on the surface,
it is nonetheless flawed.....
... governments have for some time
closely regulated bank lending,
using such measures such as reserve
and capital requirements.
Or at least they used to.
... they are not burdened by either
reserve or capital requirements. This is precisely why
we make the argument that the mechanism of money market
funds taking deposits and lending into the capital marke
ts provides an "infinite multiplier" for money and credi
t creation. Unlimited additional money market liabilitie
s can be created as long as deposits are made into money
market funds and these deposits are lent and re-circulate
d back into additional money market deposits.
... To keep the game going would necessitate
an acceleration of credit growth, and to accomplish this,
the "intermediation" function took on momentous importance.
What was really needed was a mechanism to convert
$100's of billions of risky loans into securities
that even the most risk-averse would be willing to hold.
What developed was one of history's great alchemies,
the "conversion" of loads of risky securities
into something people love: money.
This was quite an accomplishment and for this magic,
Wall Street teamed with the GSEs.
... with their special status
as government-sponsored enterprises
and the perception that the US government
would stand behind these institutions' debt
in case of crisis, Fannie Mae, Freddie Mac
and the Federal Home Loan Bank System
have been granted virtually unlimited access
to the capital markets. No matter how leveraged
these institutions become, they maintain AAA ratings
and have unlimited access to money market borrowings....
So, one might ask,
why do we have a problem with this arrangement
of converting risky debt into money?
Well, we actually have a list of concerns,
but for this discussion there is a key aspect
of this seemingly wonderful alchemy
that needs to be highlighted: derivatives.
But first, one more point needs to be made about money.
We mentioned earlier that one of the key characteristics
of money is the perception that it is a "store of value".
This is critical.
... must look elsewhere to obtain
what is perceived to be an adequate risk buffer.
This "elsewhere" has become the derivatives marketplace....
... Derivatives are clearly the weak link in the chain.....
... it is our contention that the interest rate
derivative marketplace is now in dislocation
and that this will prove a seminal event
for the US credit bubble.....
In conclusion, it is critical to recognize
how fragile and vulnerable a system becomes
when the capital markets take the lead
as instigators of money and credit excess.....
... financial historians will not be kind
when they look back at the proliferation
of derivatives and the unprecedented credit
and speculative excess fueled by the GSEs,
money market funds, banks, hedge funds,
Wall Street firms, and the aggressive
US financial sector generally.
Not only have they fostered major distortions
and imbalances to both the financial system and economy,
they have also poisoned our money supply.
How this all plays out is today uncertain but,
unfortunately, such egregious excesses only end badly.
this all plays out is today uncertain but,
unfortunately, such egregious excesses only end badly. |
