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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (102061)	9/16/2009 4:59:02 PM
From: Hawkmoon	2 Recommendations Read Replies (2) \| Respond to of 116555

What happens when a fractional reserve banking system lends out one billion Dollars? It increases the amount of money on deposit available to lend by more than a billion Dollars. This drives down interest rates. Who do they lend it to? And why would those borrowers put it in a interest bearing account that pays LESS than the loan they took out? Think about that. Right now the Fed is taking questionable assets onto their balance sheets and letting banks borrow money.. A questionable and dubious practice. It's also paying interest on reserves, a practice never before implemented. And from my understanding, the majority of those banks are buying T-Bills, being supplied by Obama's massive "recovery" stimulus.. again.. dubious and questionable, especially given how that governmental borrowing is being spent. The real problem, IMO, is that no one wants to lend against depreciating collateral, which is the case when demand is outstripped by supply because of unwillingness to lend. It's a deflationary spiral that will, if unchecked, render us a cash and carry society where only cash rich individuals will have the ability to own property. And in an environment where the financial surety sector has been decimated, if not nearly wiped out. All that primarily remains are the unregulated bucket shop CDS markets, where manipulative practices can easily target debt offerings and undermine their value on a mark to market basis. And once again, I ask you.. the Japanese have some $25 Trillion in personal savings, drawing practically zero interest. One would think, according to your theories, that investment would be booming there given the ready supply of capital that needs to find sufficient yield. But the only demand that seemed willing to borrow Japanese savings were foreign countries, via the carry trade. So explain to us again how supply and demand impact the Japanese financial markets. The amount of money on deposit contracts sharply -- unless you have a central bank, like the Fed, which creates a huge amount of new money to offset the contraction. You need to acquaint yourself with monetary velocity and it's relation to money supply and GDP. It doesn't matter if money supply goes up if the velocity of monetary transactions decreases by the same amount (or greater). en.wikipedia.org Here.. let John Mauldin teach you some economics: 2000wave.com Btw, there's nothing wrong with a CONSERVATIVE fractional reserve system based upon realistic models of expected defaults versus performing loan portfolios, say between 9:1 and 12:1 depending on economic conditions and asset valuations.. It's when this ratio exceeds common sense (as we saw with 40:1 leverage, or even 70:1 leverage as seems evident in Europe, that problems arise. Hawk