Is the US too big to fail?

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I'm going to have to reconsider my outlook on inflation versus deflation. (For the record, I thought we were headed for deflation because the government couldn't print money as fast as it is vaporized. It looks like I am wrong)



<a href="http://www.bloomberg.com/apps/news?pid=20601009&refer=bond&sid=aDqw8_eMzrhU">Fed prepared to lend $7.4 trillion?</a>
 
[quote author="upperlowerclass" date=1227579655]How is this story not all over the place? This is huge, and bloomberg is the only one on it? weird...</blockquote>


I agree that it is huge, but disagree that it is wierd. It seems that the information which I have thought critical for the last couple years is not even reported in the MSFM. The more I think about it and read posts, it occurs to me that it is just more evidence of a dumbing down. Most folks do not care to think for themselves, but would rather have CNBC tell them what to think. Many times I will post what I think is important information and will wait for a response. Most of the time there is no response, and when there is, the response seems to be some banal nonsense being spouted by some cheerleader on CNBC.
 
[quote author="awgee" date=1227586909][quote author="upperlowerclass" date=1227579655]How is this story not all over the place? This is huge, and bloomberg is the only one on it? weird...</blockquote>


I agree that it is huge, but disagree that it is wierd. It seems that the information which I have thought critical for the last couple years is not even reported in the MSFM. The more I think about it and read posts, it occurs to me that it is just more evidence of a dumbing down. Most folks do not care to think for themselves, but would rather have CNBC tell them what to think. Many times I will post what I think is important information and will wait for a response. Most of the time there is no response, and when there is, the response seems to be some banal nonsense being spouted by some cheerleader on CNBC.</blockquote>


Want some analytical thinking?



Here goes.



First of all, I'm reading that the action in the latest Treasury auction of 2 year notes is weak. The Treasury sold $36 billion of two year notes today. (That's up by $2 billion from September and October, and more than double what they sold last November) The bid/cover ratio was 2.08 versus an average of 2.3 over the past year. The bid/cover ratio today was the lowest since July '06.



Though one month doesn't make a trend, the growth in need for the Treasury to issue notes in a world where credit is dear implies that interest rates are going to go up.



Combine that with the explosion in the national debt ($7.4 trillion mentioned in the article I linked to earlier, plus projections of up to a $2 trillion budget deficit next year), and the $412 billion we spent paying interest on the national debt last year could explode to $850 billion next year IF INTEREST RATES DON'T GO UP!



I think we are rapidly reaching a tipping point in this country. If the Federal government continues to spend money on things it isn't constitutionally allowed to spend money on, we could find our nation going through what the Soviet Union went through in the mid 90's.
 
How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?
 
[quote author="upperlowerclass" date=1227592274]lol article title updated to 7.7 tril</blockquote>


It's even worse. It's 7.76 trillion and should be rounded to 7.8 trillion.



I'm almost afraid to click that link again!
 
[quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


A private corp. w/ a printing press... how do i start one of those? Pretty good business model, I bet I could be profitable.
 
[quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>
Quite a few, I imagine. But rather than just shout "Fire", maybe you could tell me where I can find a fire alarm, or an extinguisher, or an exit. Because I'm not finding a whole lot of solutions to what is happening, just a whole lot of pet theories about what happens next and who is to blame.
 
[quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


I would like to discuss this idea further because I am still of the mindset of Winex's first post that the FED is not printing money fast enough to keep up with the rate of money destruction in the banking industry. If the FED prints money, and if money is being simultaneously destroyed by loans going bad, isn't that the essence of deflation, and doesn't that actually make our currency more valuable? Isn't less money chasing the same amount of goods and services?



With as alarming as the activities of the FED are, I still don't see how all this printing money is inflationary in an environment where money is disappearing even faster through loan losses.



Now, I can see a point in the future where the FED is still printing money and there is no destruction of money to counterbalance it. Then we would have rising interest rates and inflation. In my opinion, we are at real risk of seeing a double-dip recession. The first is going on now, and the second will be caused by the rising interest rates necessitated to fight the inflation that is bound to come later.
 
[quote author="IrvineRenter" date=1227605020][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


I would like to discuss this idea further because I am still of the mindset of Winex's first post that the FED is not printing money fast enough to keep up with the rate of money destruction in the banking industry. If the FED prints money, and if money is being simultaneously destroyed by loans going bad, isn't that the essence of deflation, and doesn't that actually make our currency more valuable? Isn't less money chasing the same amount of goods and services?



With as alarming as the activities of the FED are, I still don't see how all this printing money is inflationary in an environment where money is disappearing even faster through loan losses.



Now, I can see a point in the future where the FED is still printing money and there is no destruction of money to counterbalance it. Then we would have rising interest rates and inflation. In my opinion, we are at real risk of seeing a double-dip recession. The first is going on now, and the second will be caused by the rising interest rates necessitated to fight the inflation that is bound to come later.</blockquote>


Agreed. The amount of money moving around in our economy right now is a fraction of what it was a year ago.
 
[quote author="Oscar" date=1227604430][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>
Quite a few, I imagine. But rather than just shout "Fire", maybe you could tell me where I can find a fire alarm, or an extinguisher, or an exit. Because I'm not finding a whole lot of solutions to what is happening, just a whole lot of pet theories about what happens next and who is to blame.</blockquote>


Why do you assume there is a solution?
 
[quote author="IrvineRenter" date=1227605020][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


I would like to discuss this idea further because I am still of the mindset of Winex's first post that the FED is not printing money fast enough to keep up with the rate of money destruction in the banking industry. If the FED prints money, and if money is being simultaneously destroyed by loans going bad, isn't that the essence of deflation, and doesn't that actually make our currency more valuable? Isn't less money chasing the same amount of goods and services?



With as alarming as the activities of the FED are, I still don't see how all this printing money is inflationary in an environment where money is disappearing even faster through loan losses.



Now, I can see a point in the future where the FED is still printing money and there is no destruction of money to counterbalance it. Then we would have rising interest rates and inflation. In my opinion, we are at real risk of seeing a double-dip recession. The first is going on now, and the second will be caused by the rising interest rates necessitated to fight the inflation that is bound to come later.</blockquote>


How much has been destroyed through debt reduction? Not asset depreciation, but actual debt reduction? Depreciation of equity in home value and stock depreciation has no direct effect upon money supply.



Let us assume that debt reduction is presently greater than increases in the money supply. How long do you think that will last?
 
[quote author="Joe33" date=1227608274][quote author="IrvineRenter" date=1227605020][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


I would like to discuss this idea further because I am still of the mindset of Winex's first post that the FED is not printing money fast enough to keep up with the rate of money destruction in the banking industry. If the FED prints money, and if money is being simultaneously destroyed by loans going bad, isn't that the essence of deflation, and doesn't that actually make our currency more valuable? Isn't less money chasing the same amount of goods and services?



With as alarming as the activities of the FED are, I still don't see how all this printing money is inflationary in an environment where money is disappearing even faster through loan losses.



Now, I can see a point in the future where the FED is still printing money and there is no destruction of money to counterbalance it. Then we would have rising interest rates and inflation. In my opinion, we are at real risk of seeing a double-dip recession. The first is going on now, and the second will be caused by the rising interest rates necessitated to fight the inflation that is bound to come later.</blockquote>


Agreed. The amount of money moving around in our economy right now is a fraction of what it was a year ago.</blockquote>


Really? And how much money is moving around our economy right now compared to a year ago?
 
<a href="http://online.wsj.com/article/SB122748912533552007.html">I thought of awgee when I read this well written WSJ op/ed piece today, on this very subject.</a>
 
[quote author="IrvineRenter" date=1227605020][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


I would like to discuss this idea further because I am still of the mindset of Winex's first post that the FED is not printing money fast enough to keep up with the rate of money destruction in the banking industry. If the FED prints money, and if money is being simultaneously destroyed by loans going bad, isn't that the essence of deflation, and doesn't that actually make our currency more valuable? Isn't less money chasing the same amount of goods and services?



With as alarming as the activities of the FED are, I still don't see how all this printing money is inflationary in an environment where money is disappearing even faster through loan losses.



Now, I can see a point in the future where the FED is still printing money and there is no destruction of money to counterbalance it. Then we would have rising interest rates and inflation. In my opinion, we are at real risk of seeing a double-dip recession. The first is going on now, and the second will be caused by the rising interest rates necessitated to fight the inflation that is bound to come later.</blockquote>
My understanding is that there is relatively little money destruction going on, but rather relatively massive credit destruction in the form of deleveraging. Yes, the banks have written down billions in losses, but they have also sucked up every last bit of capital available to meet reserve requirements in case they have to take trillions in liabilities back on their books (and then realize losses on them). So far the approach has been to shovel cash out the door in the form of Fed repo's to anyone with a pulse, direct liquidity injections from the Treasury, as well as opening swap lines for central banks who are running short of dollars. This doesn't imply an immediate cash crunch so much as it does a credit crunch. According to <a href="http://stockweb.blogspot.com/2008/10/total-subprime-writedowns-and-finacial.html">StockWeb</a> the total losses written down are only $592 Billion, and yet that number is dwarfed by the $3.18 Trillion the Fed has already issued in the forms of repos, swaps, guarantees, and loans. That's not money, it's credit and once it's spent it becomes debt. I think we aren't seeing inflation because the credit isn't being spent but hoarded as "proof" of viability.
 
[quote author="awgee" date=1227619355][quote author="Oscar" date=1227604430][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>
Quite a few, I imagine. But rather than just shout "Fire", maybe you could tell me where I can find a fire alarm, or an extinguisher, or an exit. Because I'm not finding a whole lot of solutions to what is happening, just a whole lot of pet theories about what happens next and who is to blame.</blockquote>


Why do you assume there is a solution?</blockquote>
There is always a solution. It may be painful, harsh, and impossible to contemplate but it is still a solution.
 
Anyone have a good book suggestion on money, credit, debt, inflation/deflation and the such? I took a year of quantum mechanics in college and I swear this stuff sometimes rivals the complexity.
 
Stolen from a comment on Calculated Risk:

<img src="http://www.realmeme.com/roller/images/TheCrash/fedExponentialCurve.png" alt="" />

<blockquote>Notice that if you extrapolate the pre-existing exponential function from 2001, you come pretty close to the current Treasury bailout size. I suspect that derivatives trading obscured the missing money growth by substituting a linear function for the exponential function over a certain monetary / complexity range. When it finally failed, the retrace is close to what the previous exponential growth would have been.



Look at the 1995-2001 period. The same thing happens. For five years, the exponential growth is surppressed but during the 2001 recession, there's a sudden pop as the trend line re-asserts itself.



What does it mean if this is true?

That the bailout amounts will keep rising exponentially until... </blockquote>
<a href="http://www.realmeme.com/roller/page/realmeme/20081125">Source</a>

In other words, we aren't seeing inflation because the derivatives acted as money (and subsequently advanced inflation) and now the Fed & Government are scrambling to replace the fake cash with 'real' cash. I'm not saying I endorse this idea, just that I found it intriguing.
 
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