Please, help me see the emperor's clothes!

[Penny Lane]

Help me out here. Volcker claims he raised interest rates. I just don't see the evidence.

Here, Volcker describes (http://www.pbs.org/fmc/interviews/volcker.htm) how he raised interest rates.

QUESTION: What did you do at the Fed to fight inflation?
PAUL VOLCKER: Well, the Federal Reserve had been attempting to deal with the inflation for some time, but I think in the 1970s, in past hindsight, anyway, [it] got behind the curve. It's always hard to raise interest rates.


By the time I became chairman and there was more of a feeling of urgency, there was a willingness to accept more forceful measures to try to deal with the inflation. And we adopted an approach of doing it perhaps more directly, by saying, "We'll take the emphasis off of interest rates and put the emphasis on the growth in the money supply, which is at the root cause of inflation" - too much money chasing too few goods …- "so we'll attack the too-much-money part of the equation and we will stop the money supply from increasing as rapidly as it was."


And that led to a squeeze on the money markets and a squeeze on interest rates, and interest rates went up a lot. But we didn't do it by saying, "We think the appropriate level of interest rates is X." We said, "We think the appropriate level of the money supply or the appropriate rate of the money supply is X, and we'll take whatever consequences that means for the interest rate because that will enable us to get inflation under control, and at that point interest rates will come down," which, of course, eventually is what happened.


And yet, I don't see that he did a single thing differently to before. It's certainly not evident in the m1, m2, m3 figures.

http://i4.tinypic.com/1087leo.jpg

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I don't see anything that was appreciably different in the M figures to justify Volcker claiming he did anything by way of adjusting the money supply to effect high interest rates.

Instead, I posit that the reason high interest rates occured in the late 1970s was simply a function of moneylenders requiring a real rate of return for their money.

When there is increased scarcity of important resources such as oil, that is felt as high inflation.

Since the banks are a business, their decisions to loan must be based on the following:

a) an interest rate that will maintain the purchasing power of their loaned dollars, i.e. it must be greater than the inflation rate.

b) a loan to value ratio set such that should the bank be forced to foreclose, the bank will not have lost money. As such, the maximum loan value must be the worst case liquidation value of their collateral.

Although the government may fool the banks temporarily with fudged CPI figures, eventually the banks will be forced in harsh economic times to reduce supply of new loans (for example, if every bank across the board lowers loan to value ratios from 95% to 60% in housing, that is 35% drop in the supply of loans provided the housing values stay the same). Both this and the fact that banks must maintain purchasing power of their loans requires that they raise the price of their loans (the interest rate).

Based on that and the lack of evidence for Volcker doing anything of any substance I am forced to conclude that he was just a new soothsaying figurehead, brought in because the old one appeared to have failed.

The high inflation was brought on because of a combination of the Arab Oil Embargo and Nixon closing the gold window. And so the banks had to raise interest rates; they had no choice. But perhaps to misdirect the anger of the average American away from their direction, they had Volcker take the heat as he was part of what is seen to be a public body.

Let me know if I'm wrong, and explain why, because if I am I'd love to know why. As it is I have to call BS on Volcker's explanation.

[edjerider^]

The first thing we need to understand is that the banks can't lose money. This is because for every dollar they hold on deposit they are allowed, by government banking laws, to loan out around 9 times as much. This is where the leverage begins. The phantom money is created as a book entry, or in today's world, as a computer entry. It is then transfered to the form of a cheque, gets deposited into someones account and then gets transferred this way and that but never actually sees the light of day. This is because very few people selling houses go out and spend the money at Kmart. the money is invariably re-deposited in some bank somewhere or converted into some other form of non-cash investment. Most of the "money" exists out of sight, so to speak.

Now as soon as the money is loaned it is being repaid right! Repaid with compound interest! So before to long the bank has an abundance of cash, much more than the puny deposits of a few hundred thousand working class folk.

Due to this system it is in the banks interests to foreclose on as many homes/businesses etc as their flow can accommodate. When they foreclose they sell off and make an instant profit as well as acruing a tax deduction, "bad loan". That is why every couple of decades the rates cycle up and down. When they are down they trap as many people as possible into long term loans and then jack the rates back up again through a range roughly between 6~20% PA. A little lower in the US market. Back in the 80's the US and the AUS rates were well in step as they went up. I don't know about other western nations but I would assume they followed suit. Because this cycle is quite long there is no knowledge of it in the general public's mind.


It's just a racket :bandito:



http://afr.com/articles/2006/05/05/1146335893030.html

When Howard was treasurer from 1977 to 1983, the interest rate on my home loan rose from 9.5 per cent to 13.5 per cent and it would have gone higher if NSW Labor Premier Neville Wran had not capped the interest on my loan, which was with the then Rural Bank of NSW. I was lucky. Other people were not.

And in the US.

http://www.hsh.com/natmo83.html
National Monthly Averages, 1983
Date Fixed Rate
Mortgage Adjustable Rate
Mortgage
Jan-83 13.40% 12.71%
Feb-83 13.35% 12.49%



All rates get effected similarly

Superfund Interest Rates
1980 to Present

http://www.epa.gov/ocfo/finstatement/superfund/int_rate.htm

[Book]

As it is I have to call BS on Volcker's explanation. -Penny Lane


14712

The Emporor is naked in light of your facts.
:deal:

[Penny Lane]

The first thing we need to understand is that the banks can't lose money.

Really? Let's say that I am the NAB. I have $385 billion dollars in liabilities. I have total assets of $419 billion dollars. In amongst those total assets I have $260 billion dollars in loans, many of those for housing. (This is directly from their 2005 annual report, which you can find from their website.)

Ok, if the real estate bubble collapses and it turns out that the $260 billion dollars in loans are only backed by $150 billion dollars of collateral, and I am forced to foreclose on a bunch of mortgages, it is well possible that I could go bankrupt.

If it is only possible for banks to make money, could you explain to me how this situation arose?


http://i4.tinypic.com/10ddqn8.jpg

[Penny Lane]

And also, what you are saying is that I am right about Volcker blowing smoke? It's just that my alternative hypothesis is incorrect?

I'd still love to see someone back up Volcker's statement, as I can't see any evidence for it and it gets quoted quite a bit around here. I'd just like to get a little closer to understanding the system.

[Waypoint-Trading]

And also, what you are saying is that I am right about Volcker blowing smoke?

Penny - not exactly. What Volcker said was he was going to LIMIT the money supply growth. It was growing out of control. They WANT inflation, but at less than 5% per year. That is what your chart shows you. Limited money supply growth. It would be much steeper if he didn't target money supply rather than interest rates.

His statement about "We'll take the emphasis off of interest rates and put the emphasis on the growth in the money supply, which is at the root cause of inflation" is exactly correct, the money supply grew slower because interest rates were allowed to float rather than pick an interest rate target.

Nonetheless, money supply will still grow - it is the RATE that is slowed.

Hope this helps! :rose:

[Penny Lane]

Waypoint, I see nothing on the M3 graph but a straight line before and after Volcker stepped into office. Would you explain the mechanism behind why M3 would have taken off in 1979 if Volcker had kept up the status quo method of doing things? And also show how that methodology predicted what his predecessor did?

Thanks.

[Penny Lane]

http://i4.tinypic.com/10diqls.gif

You are right, when you look at it with the percentage changes, there does appear to be a difference.

[Waypoint-Trading]

Penny - the FED can only control M1 and M2 by raising and lowering Short-Term interest rates. It cannot control long term rates. M1 and M2 are short term indicators that react to rates. The FED cannot control M3 as they are more responsive to long term rates. (if they could control it then they would still publish it today :proud: ) You will note that M1 and M2 remained relatively flat in 1979-1980 then rose gradually as the economy of the early 1980's grew over time.

The greatest problem in 1979-1980 was stagflation, no growth and high inflation due to increased prices (mostly for energy - sound familiar) and wage rates thus they needed to be choked off with higher interest rates, greatly decreasing economic activity (recession). Higher interest rates attract money for deposits thus increasing money supply from foreign sources. The M3 growth you see in your charts is probably due to attractive interest rates bringing in big money flows from foreign investors. Why not? Can you get 18% on your money today? You will note however that M1 (essentially printed money)remains flat and M2 rises slowly over time.

When Alan Redspan took office he began to increase money supply greatly as growth in the economy demanded it. No problem if an economy is growing, especially if our Mexican and Chinese friends are kind enough to drive down labor costs and wage inflation by taking our jobs overseas, and shipping back cheap goods for us to buy and keep a lid on prices.

[Ponce Cuba]

Maybe this time the emperador really don't have any clothes on?????

[Penny Lane]

Waypoint, I don't understand what you are talking about. I don't mean to be harsh, I just want to gain a rigorous understanding.
Penny - the FED can only control M1 and M2 by raising and lowering Short-Term interest rates.
Can you tell me the mechanism by which they do this? With links?
It cannot control long term rates.
Agreed.

M1 and M2 are short term indicators that react to rates.
Here is what M1 is:

One measure of the money supply (http://www.investorwords.com/3110/money_supply.html) that includes all coins, currency held by the public, traveler's checks (http://www.investorwords.com/5055/travelers_checks.html), checking account (http://www.investorwords.com/846/checking_account.html) balances, NOW (http://www.investorwords.com/3227/NOW.html) accounts, automatic transfer service accounts, and balances in credit unions (http://www.investorwords.com/1214/credit_unions.html).

M2: One measure of the money supply (http://www.investorwords.com/3110/money_supply.html) that includes M1 (http://www.investorwords.com/2908/M1.html), plus savings and small time deposits (http://www.investorwords.com/4977/time_deposits.html), overnight repos (http://www.investorwords.com/3553/overnight_repos.html) at commercial banks (http://www.investorwords.com/955/commercial_banks.html), and non-institutional (http://www.investorwords.com/2501/institutional.html)money market (http://www.investorwords.com/3106/money_market.html) accounts. A key economic indicator (http://www.investorwords.com/1643/economic_indicator.html) used to forecast (http://www.investorwords.com/2038/forecast.html)inflation (http://www.investorwords.com/2452/inflation.html).

M3: One measure of the money supply (http://www.investorwords.com/3110/money_supply.html) that includes M2 (http://www.investorwords.com/2909/M2.html), plus large time deposits (http://www.investorwords.com/4977/time_deposits.html), repos (http://www.investorwords.com/4186/repos.html) of maturity (http://www.investorwords.com/3017/maturity.html) greater than one day at commercial banks (http://www.investorwords.com/955/commercial_banks.html), and institutional (http://www.investorwords.com/2501/institutional.html) money market (http://www.investorwords.com/3106/money_market.html) accounts.

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http://i4.tinypic.com/10dyzj7.gif

The FED cannot control M3 as they are more responsive to long term rates. (if they could control it then they would still publish it today :proud: ) You will note that M1 and M2 remained relatively flat in 1979-1980 then rose gradually as the economy of the early 1980's grew over time.
I don't see that in the above, more detailed graphs.

The greatest problem in 1979-1980 was stagflation, no growth and high inflation due to increased prices (mostly for energy - sound familiar) and wage rates thus they needed to be choked off with higher interest rates, greatly decreasing economic activity (recession). Higher interest rates attract money for deposits thus increasing money supply from foreign sources. The M3 growth you see in your charts is probably due to attractive interest rates bringing in big money flows from foreign investors. Why not? Can you get 18% on your money today? You will note however that M1 (essentially printed money)remains flat and M2 rises slowly over time.
Big money flows? It doesn't make sense to me. M3 is supposed to measure the whole supply of dollars worldwide. Either that money is there or it isn't, and those outside the US either had it already or didn't so I don't see how that would show up in M3.

[edjerider^]

Ok, if the real estate bubble collapses and it turns out that the $260 billion dollars in loans are only backed by $150 billion dollars of collateral, and I am forced to foreclose on a bunch of mortgages, it is well possible that I could go bankrupt.

If it is only possible for banks to make money, could you explain to me how this situation arose?




When I stated that banks can't lose money I was referring to their own money. They can lose yours any day of the week and there is no come back for you in that scenario.

And yes, of course banks can go bankrupt, they have, all through history, and they will again in the very near future no doubt. But the money they created, that was loaned out over the last 50 years or so, and then repaid with interest has been siphoned off to it's masters and invested in infrastructure. Then the bank goes bust! What happens then? You and everyone else lose their savings, aside from say a few cents on the dollar, the mortgages and infrastructure is sold to "another friendly bank" at fire-sale prices, and the CEO moves on to a better job, or a happy retirement. The people who created the bank and oversaw it's operation will have been well paid over the years of operation both through direct profits as well as indirect profits, whereby the bank would have invested in their other various holdings.

Every 50~60~70 years the entire economic system reaches maximum debt potential and must be crashed so a fresh version can be started. This is why we have had global economic crashes and depressions on a regular basis for the past 3~400 years. When the system crashes the stockmarket, housing markets and industrial sectors are all reduced greatly in price and this is when the elite, through their use of their banking systems, move in and buy up at the cheap price.

What some prick like Volcker says or doesn't say is irrelevant because he was no more than a front man for the federal reserve banking system, a system wholly owned and controlled by faceless men behind massive "Privately Owned" banking conglomerates. These are the moneylenders to the moneylenders you refer to and Volcker got his pay cheque from them, the elite world bankers. That is where his loyalty resided so anything he portrayed in the media was not worth listening to. Did you know that the fed is privately owned? I would assume you do since you are here. Did you know that most all Americans think it is a branch of their own federal government, that they, the people, own it? Do you know who controls Australia's federal reserve?

Did you know that the majority of Australian super fund dollars are invested in the stock market. Did you see everyone lose money from their super back in 02? Now did you see the signs on the buses a year or so back "Your Super, Your Choice" That is the system telling us that in a few short years our retirement money will be stolen from us and that we will only have ourselves to blame because it was your choice to leave it in the market. In reality the money is already gone! 20 years to get everyone hooked and in deep, 20 years of weekly installments to pump and pump the now desperately over-inflated stock markets and real estate markets, nearly all the money taken out the back door now, spent or transferred into swiss gold, power companies, water companies, anything that will not collapse and that will generate income in the future. And all that is left for the super dollars to hide in are the paper promises of companies like Enron, global crossing and HIH. Look at Google! $400 a share it was a while back and all it has is a bunch of secondhand computers in leased warehouses and the reputation as the world's leading search engine. 8 years ago AltaVista was the biggest, who will be the biggest next and what will Google shares be worth then? Madness! But the people in control of the pension money are going to dinner with the owners of these shitty companies and they will take the kickback and tomorrow they will transfer 50 million dollars of the working classe's money into some useless company that is about to go bankrupt.

I hope you have some bullion saved :smokin:

[Waypoint-Trading]

Can you tell me the mechanism by which they do this? With links?



Linky I cannot find :afraid:


M3: One measure of the money supply (http://www.investorwords.com/3110/money_supply.html) that includes M2 (http://www.investorwords.com/2909/M2.html), plus large time deposits (http://www.investorwords.com/4977/time_deposits.html), repos (http://www.investorwords.com/4186/repos.html) of maturity (http://www.investorwords.com/3017/maturity.html) greater than one day at commercial banks (http://www.investorwords.com/955/commercial_banks.html), and institutional (http://www.investorwords.com/2501/institutional.html) money market (http://www.investorwords.com/3106/money_market.html) accounts.

http://i4.tinypic.com/10dyzaq.gif

http://i4.tinypic.com/10dyzj7.gif

I don't see that in the above, more detailed graphs.



Note in your first graph in 1980-1982 when the money supply dropped. There is no other instance when the rate was negative until the 1987 crash and 1996 (don't know why) 1998 Asian Crisis, and 2002 recessions.


Big money flows? It doesn't make sense to me. M3 is supposed to measure the whole supply of dollars worldwide. Either that money is there or it isn't, and those outside the US either had it already or didn't so I don't see how that would show up in M3.

You will note "Central Bank Holdings" are not part of any "M" definitions, nor are there any stock holdings, treasury bills/bonds, real estate, foreign currencies, or PM's etc., which can be converted into "M's" easily. When big money flows it normally doesn't flow into bank accounts, but when it moves it often shows in changes in the money supply.

[bl96S5eu]

Did you know that the majority of Australian super fund dollars are invested in the stock market. Did you see everyone lose money from their super back in 02? Now did you see the signs on the buses a year or so back "Your Super, Your Choice" That is the system telling us that in a few short years our retirement money will be stolen from us and that we will only have ourselves to blame because it was your choice to leave it in the market. In reality the money is already gone! 20 years to get everyone hooked and in deep, 20 years of weekly installments to pump and pump the now desperately over-inflated stock markets and real estate markets, nearly all the money taken out the back door now, spent or transferred into swiss gold, power companies, water companies, anything that will not collapse and that will generate income in the future.
Actually I'll have to admit that I didn't really consider other countries when doing my research on the Fed, the information about Australia is interesting and I look forward to learning more when I have some time. BTW, beautiful country you have there aside from the sods in control of your money.

[pancjn]

Great discussion!! Looking forward to more from informed sources like these.