Wikinvest Wire

Where did all the money go?

Friday, January 30, 2009

Kudos to the Guardian for getting at the root of the problem in the very first paragraph of what is a nicely done interactive graphic on the financial crisis.
IMAGE That little red circle is the amount of money injected into the financial system over the last year or so, roughly $1.9 trillion. Atop that are banks' gold reserves, cash in circulation, the traditional banking system, and the shadow banking system.

The big kahuna atop them all - some $290 trillion worth - is the great global asset bubble.

Regarding gold reserves, they note the following:

Ever since central banks stopped pegging their currencies to the price of gold, money has been a nebulous concept: a promise to pay the bearer, or "cheque" from the central bank, rather than a permanent store of wealth.
It's hard to get really big asset bubbles when money is anchored to something.

11 comments:

Evan said...

As far as money being a nebulous concept, I often go into coin stores and look at old paper money like silver certificates, or even old regular paper money and I noticed that it used to say, "Federal Reserve Note, will pay to the bearer on demand ... $" but now it says "Federal Reserve Note." They are trying to say that the piece of paper is $20. Unlike the Constitution according to GHWB, it is just a goddamn piece of paper.

marku said...

"It's hard to get really big asset bubbles when money is anchored to something."

I read this alot, but it is not true. The US and Europe have had bubbles'a'plenty while anchored to metal standards. All you really need for a good bubble is enough leverage, and no debasing the currency is required. For eaxample, the panic of 1873 (from wiki) was exacerbated by
"At the end of the Civil War, there was a boom in railroad construction, with 35,000 miles (56,000 km) of new track laid across the country between 1866 and 1873. The railroad industry, at the time the nation's largest employer outside of agriculture, involved large amounts of money and risk. A large infusion of cash from speculators caused abnormal growth in the industry and overbuilding of docks, factories and ancillary facilities. At the same time, too much capital was involved in projects offering no immediate or early returns"

It is interesting to go to wiki and type in "panic of" in the search pane and get a pull down of 11 different panics, all occurring before the fiat era.

Anonymous said...

It is interesting to go to wiki and type in "panic of" in the search pane and get a pull down of 11 different panics, all occurring before the fiat era.

Yes, but the worst of those panics lasted 2 years. Whereas the Great Depression lasted 15.

DrKewp said...


Yes, but the worst of those panics lasted 2 years. Whereas the Great Depression lasted 15.


Uh, we were still on the gold standard during the Great Depression?

Anonymous said...

re Panic of 1873: http://mises.org/story/1428

The Legal Tender Act authorized the issue of $150 million in government currency and a bond issue of $500 million. The notes, soon known as "Greenbacks," were made legal tender for all private debts, receivable by the government for taxes and land sales (but not import duties), and were fundable into the bonds.

The war being ended, the financial question took this form: Shall we withdraw the paper, recover specie, reduce prices, lessen imports, and live economically until we have made up the waste and loss of war, or shall we keep the paper as money, export all our specie which has hitherto been held in anticipation of resumption, buy foreign goods with it, and go on as if nothing had happened?" In other words, should the country return to hard money and correct at once the imbalances and malinvestments wrought by four years of inflation and war, or should it continue with soft money and attempt to perpetuate wartime boom. The majority Republicans again opted for inflation. Thus, the inflationary boom, inaugurated by the war and the Greenback, continued unabated until the panic of 1873 brought it to a close.

See the paper bringing up that bubble?

Nostradamus, apparently said...

Here's what Mackinac says about whether a gold standard caused the great depression:

"Blaming the gold standard for the Great Depression ignores the substantial monetary manipulations of the Federal Reserve System in the 1920s and 1930s—manipulations that would have been utterly impossible if the country had not already abandoned major elements of the gold standard and bestowed wide discretionary powers upon government monetary authorities. As Rothbard and many others have documented, the money and credit supply was substantially increased between 1924 and 1929 by the Federal Reserve, which then presided over just the opposite: a contraction of the money supply by one-third between 1929 and 1933. This was not the normal operations of an unfettered gold standard or of a free market at work; rather, it was the result of monetary mischief at the hands of government."

http://www.mackinac.org/article.aspx?ID=686

As long as people are involved, there will be problems since people are inherently bad. There is no cure for human nature.

A gold standard isn't a panacea, it's just better than anything else at the moment. That's what the people who throw stones at Ron Paul and his ilk don't get. Don't let the perfect be the enemy of the good or, in this case, the 'somewhat better.'

It's the same with democracy and capitalism. There are lots of problems with them but the alternatives are worse.

Dan said...

As long as people are involved, there will be problems since people are inherently bad. There is no cure for human nature.

I don't understand. I believe people to be generally good in nature. According to many psychs and Dr. Phil Zimbardo, there's only about 1% of us that are truly, "bad". People have to be good to have allowed for our species to become so dominant. We evolved from hunter-gatherers to exchange-traders. Exchange relies on trust within groups. If the majority of us were bad, I don't think we would have established trust and therefore, would not have established trade or exchange.

I don't think we're bad. I think our environs set the stage for bad behavior, which from the perspective of the doer, is probably good behavior. But I really don't believe us to be all that "bad".

Nostradamus, apparently said...

Dan,

Sorry to disagree but I must. Remember the saying, "Power corrupts and absolute power corrupts absolutely."

People like Hitler and Saddam Hussein are examples of how power allows the evil in people to come to the surface.

There are always exceptions and, of course, people aren't all bad all the time.

As for our nature, human nature, as with all species, is to survive. That's another way to say that we're all selfish by nature. If we weren't we would not have survived.

Add the big brain to the selfish nature and you've got evil.

Try parking your car unlocked with the keys in it in any big city and see how good people are.

The bottom line is that you simply cannot trust leaders to do the right thing. If you haven't figured that out by now, you're really not paying attention. Greenspan, Bernanke, Bush, Cheney, Obama, Blago, Spitzer, Clinton, Foley, etc., etc. The list is endless.

little larry sellers said...

Dan,

I remember reading some of Zimbardo's book "Lucifer Effect" which IIRC tried to demonstrate how ordinary people could do "evil" things. I think his Stanford prison study also reinforced that point. While I agree that people aren't naturally bad, I don't think they're necessarily naturally good either. Milgram's famous study is a shining example of this.

Nostradamus,

I know I'm opening a can of worms with little or nothing to gain, and off topic no less, but I still don't see why people brand Saddam as "evil" other than relentless American media brainwashing. He was a run of the mill dictator for the most part and when he did his most "evil" deeds, only Iran seemed to care (we certainly didn't). I'd go so far as to say many Iraqis would prefer Saddam's rule to the hellish environment they find themselves in today. Riverbend's old blog was very illuminating in this matter, and she was from a mixed Sunni/Shi'ite family.



Back to the topic at hand, obviously $290T is a staggering figure. I agree that a gold standard or other anchor is not a panacea, but we should be very interested in doing whatever it takes to avoid these enormous bubbles in the future. As we now see, the global economy suffers far more than leading economists thought from the fallout of these bubbles.

Dan said...

@ Nostradamus

I think we actually agree for the most part.

Sorry to disagree but I must. Remember the saying, "Power corrupts and absolute power corrupts absolutely."

Yes - and I believe that speaks to my point that it is not necessarily the person, but their environment.

As for our nature, human nature, as with all species, is to survive. That's another way to say that we're all selfish by nature. If we weren't we would not have survived.

Self preservation and selfishness are two separate issues. Remember, self-preservation also has to work with group cooperation otherwise our species would eat itself alive from the inside out. Which, with fiat money and fractional reserve banking, it may be doing.

Try parking your car unlocked with the keys in it in any big city and see how good people are.

You might find it interesting to know that, from the time I started driving until I purchased a car with a keyless ignition, I always left my keys in my car, in the ignition and often never locked the doors. I did this for 16 years in the city of Los Angeles. I never had a car stolen. I did it because people (in this case, the menacing, big-city car thief) won't trust the obvious free deal. Most car thieves typically aren't "bad" people. This person is typically in a situation that has opened the door for them to steal a car in the interest of their own self-preservation, and not due to a salivating lust for stealing motor vehicles or of causing harm to other individuals. In my opinion, messing with a would-be-thief's head was a better theft deterrent than locking the thing. And I also wanted to push the envelope of the moral hazard of car insurance.

The bottom line is that you simply cannot trust leaders to do the right thing. If you haven't figured that out by now, you're really not paying attention. Greenspan, Bernanke, Bush, Cheney, Obama, Blago, Spitzer, Clinton, Foley, etc., etc. The list is endless

I'm with you on this. I really don't want a "leader" anyway. Methinks this a reason behind the argument for smaller government? Putting oneself in a position of absolute power will corrupt. The bottom line is, don't do it. Kind of like, if you are a Nazi prison guard, you will more than likely be engaged in some genocide... don't be a Nazi prison guard. So much for that big 'ol brain being part of the equation...

cheers

Nostradamus, apparently said...

If anyone is still reading this...

METHINKS the 'I-left-the-keys-in-the-car-in-LA-for-16-years' story is either a complete fabrication or you drive such a P.O.S. that even a crackhead wouldn't be caught dead in it.

My Delorean was trashed 3 times in Portland, Oregon as the would-be 'good-guys-in-bad-situation' thieves in each case were too stupid to figure out how to start it but bad enough to try and damaged it each time in the process.

The liberal blather about good people 'being caught in a situation' is stunningly naive and results in incredibly poor social policy based on a staggeringly simple and a fantastical Pollyanna view of the world.

Rather than debate further, I'll simply point to the famous Milgram Experiment and let readers draw their own conclusions about the true nature of man:

http://en.wikipedia.org/wiki/Milgram_experiment

You can watch footage from the Milgram experiment on YouTube, as well, if you want to see normal people administering lethal levels of voltage to their fellow man for merely getting an answer wrong on a test.

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