By Monty Pelerin, on March 6th, 2010 Can We Have Another Banking Holiday?
“But most commercial banking is “deposit banking” based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time.” Murray Rothbard
One of the most painful and important aspects of the Great Depression was the failure of banks. It has been estimated that before the Depression there were more than 25,000 banks in this country. At the end of 1933, 14,207 were left.
Depositors lost all or much of their money when their bank failed. Most banks were small, not unlike the one depicted in Jimmy Stewart’s classic movie “It’s a Wonderful Life.” When a bank failed in a town, fear spread. A contagion developed that caused depositors to remove money from other banks and “hoard” it. This reaction put pressure on otherwise sound banks and the banking system. A self-reinforcing spiral reduced the availability of money resulting in additional closings.
One of the first New Deal legislative acts was the closing of the banks, known as a national banking holiday. Banks were closed for about a week. Neither deposits nor withdrawals were allowed.
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The Federal Deposit Insurance Corporation was formed in 1934. Its intent was to prevent future runs on the banking system that had occurred in the early years of the Depression. Sheila Bair, current Chair of the FDIC, referenced Milton Friedman who “once called
Continue reading Can We Have Another Banking Holiday
By Monty Pelerin, on March 3rd, 2010
There is no greater scam than that being perpetuated by fiat money.
It is plausible that the gold market might be manipulated because of its critical importance to the current economic crisis. Gold is to Central Bankers and governments as The Cross was to Dracula. It threatens their existence.
Before governments got into the state of bankruptcy, gold hindered them from spending money they did not have. To truly increase spending and power, it was necessary for governments to remove the constraints gold imposed. Once that was accomplished the welfare/warfare state was off to the races.
Now, after almost forty years or nothing but fiat money, many governments are so bloated that they are no longer sustainable. Their key to survival (at least for some period) depends upon maintenance of the myth that fiat money is real. Gold is a huge threat to this scam.
Gold has been an alternate currency for thousands of years. It is the only currency that is not someone’s liability. It is not dependent upon the performance of some government. It stands on its own and always has.
Governments do not go bankrupt in the manner that businesses or individuals do. They do so by dishonoring their debts and obligations. The default can come as an outright refusal to honor claims or it can come via inflation. Most governments prefer the latter.
The soundest government in the world, until recently, was the United States. In spite of its enormous wealth and economic growth, its
Continue reading Dracula Government Meets Its Nemesis
By Monty Pelerin, on February 28th, 2010
“Crowding out” is an effect claimed to occur when governments run deficits and have to borrow to finance the deficits. It refers to the government using funds via borrowing that otherwise would go to private borrowers. Hence, they are “crowding out” the private borrowers.
In normal times, when government deficits are small relative to the economy, crowding out probably has little effect. Today, deficits are huge and the reality of crowding out is real.
Why can’t private firms “crowd out” the government? Private firms must make a profit. When they don’t they disappear (unless they are favored by the Government and get bailed out). If the interest rates private firms have to pay for new funds rises, it makes fewer investment opportunities possible. Governments do not have a profit constraint and have access to a printing press. If interest rates rise, so be it. They can and will keep on borrowing.
Businesses and consumers are claiming they cannot get credit. Some do not deserve it, but many do. The Fed has pumped enormous funds into the banking system but these funds are not being used to make loans. Loans outstanding are declining. So, what is happening? Some of the funds are being held as excess reserves (i.e., banks do nothing with them) and some are being used to finance the Federal Government deficits (an indirect way of QE). According to James Turk:
If we mark the beginning of the financial
Continue reading Crowding Out Your Future
By Monty Pelerin, on February 24th, 2010
In Jimmy Carter’s reign, the Wall Street Journal editorialized about “Ratcheting to Ruin.” The title derived from the fact that each cycle high in unemployment was higher than previous ones, and each cycle high in inflation was also. “Stagflation” was coined to describe what up until then was believed to be impossible in the Keynesian world. This period ushered in a new era in both politics and economics. Carter was replaced by Reagan, and Keynes was replaced by Friedman.
Thirty years later Keynes is back in vogue, Obama has ascended to the White House and times are again reminiscent of the Carter era. The economy is awful. Fear and dissatisfaction prevail. Politicians are held in contempt. There is one major difference – Carter did not face an “ides of March” event.
In Shakespeare’s Julius Caesar, a soothsayer warned Caesar to “beware the Ides of March.” The prescient warning did not help Caesar. As Obama approaches his March moment, no warning can change his fate.
Ben Bernanke promised to end Quantitative Easing (the printing of money to stimulate the economy and fund the deficits) by the end of March. Some believe his commitment was a “campaign promise” to ensure his Senate reconfirmation. Others believe it was a real commitment, necessary to maintain a stable dollar. Shortly, the world will find out.
Mr. Bernanke, quite unintentionally and through no fault of his own, will be Obama’s Brutus, regardless of his decision. To understand why, some numbers are necessary. Government needs funding this
Continue reading Obama’s “Ides-of-March” Moment is Near
By Monty Pelerin, on February 12th, 2010 For investors or just curiosity-seekers, how we escape from the economic mess is of interest. Jim Puplava at FinancialSense.com stated: “I believe that getting the inflation/deflation story right is the single-most important investment decision that needs to be made. It will determine the investment outcome of portfolios over the next decade.”
Investments that might be expected to do well in a deflationary environment will do poorly in an inflationary environment and vice versa. Thus, a reasoned determination of what lies ahead is critical for investing success. That determination and flexibility in case your judgment proves incorrect will be important to investment outcomes. For most investors, “buy and hold” should be considered dead. Arguably that determination should have been made a few years ago.
While no one can foresee the future, Chris Martenson has been more prescient than most. He presents a logical case for what is likely to happen below.
CHRIS MARTENSON’S BLOG
Austerity or Money Printing?
Wednesday, February 10, 2010, 8:42 pm, by cmartenson
I was asked to write a once-a-month Market Observation for Financial Sense. Here’s the first one (posted today, Feb 10):
From time to time, I think it’s a good idea to stop squinting at the short-term market wiggles and pull our heads back for a wide-angle view. Now would be a good time, so that’s what we’re going to do. For the record, I also happen to believe that close-up market analysis loses some
Continue reading Martenson’s Forecast for How This Ends
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Friedrich von Hayek
Friedrich von Hayek founded the Mont Pelerin Society.
“Monty Pelerin” is a pseudonym chosen by this blogger to convey general agreement with the philosophy, goals and spirit of the Mont Pelerin Society. No other connection exists between the blogger and the Society.
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