Being an economics major in college, I have to say it's not BS, but it's tactical, not strategic in it's thinking. Politics and greed will keep the worst case scenario's from happening. A crash of the level he's talking about wouldn't take down just the US, it would effectively trash the entire world economy; possible, but highly unlikely.
As another Eco Major I think I agree with you. The problem is that runs on banks are like a giant prisoner's dilemma. Everyone is better off getting out if there is a problem, and no worse off if there is not. What he is talking about is similar, and even if the politicians from the other countries realize what is happenning, they will probably be more likely to do what the people want so they can an keep there jobs and be on top during the depression than to try and save the world economy and end up out of office.
I agree that it is like a prisoner's dilemma. Perhaps more like the iterated version which does actually allow for cooperation to be the optimal solution.
I think countries holding large amounts of US dollars have a large incentive to talk up its value while quietly selling it off.
However those countries can probably use their influence over the US dollar to influence US policy and perhaps that is a benefit they have factored into to their currency holdings.
I'd say the chances of a collapse are unlikely unless the US decides to play 'chicken' with its creditors and is unwilling to align its spending and earnings.
I disagree (without the economics pedigree, so forgive me if I'm missing something). Politics and greed aren't all powerful and they certainly existed in the 30's. But I think he's exaggerating some aspects. In 1971, the US went completely off the gold standard not from bankruptcy but because it could. And it worked. In a sense it was a coup because it enabled unprecedented growth. The problem is that letting government completely control inflation (an invisible tax that rewards investment and punishes hoarding cash) is like letting the kid in the candy store -- with similar binging consequences.
In the end, I agree with the author that we'll see a downturn worse than the 30's. Most people didn't see that one coming either.
It's not BS? Really? Did you happen to notice any of his citations? You know, videos on YouTube, counterpunch articles, other reliable sources like that.
You're also probably not including the part in the comments where he says Federal spending has to be cut 134% to "balance the economy," citing an article he read somewhere but can't seem to track down right now. And then the part where he repeats the unsourced, unexplained claim.
C'mon. The guy's a crank, and not even a Jude Wanniski-caliber crank. Just because he hates WIPO doesn't mean he's right about anything else.
Very interesting article, However I don't know enough about global economy to assess whether he is right or not. He does make some pretty big assertions and accusations though.
Anybody know whether this is right, total b.s. or somewhere in between?
To be more specific, though, the author is right that there are a lot of dollars out there being hoarded because the USD is the global standard currency, and that its fall from that status will have some interesting consequences. Pretty much every other factual claim of the article is nonsense. His explanation of fractional reserve banking is upside-down. He pulled the conjecture "if the interest rate is 4%, then 4% of all credit will default" from the deepest recesses of his rectum. The assumption that the economy will revert to the state it was in just before the end of Bretton Woods reads more like the lazy premise of a short story than an economic theory.
Yep. I actually was somewhat credulous until he got fractional reserve banking backwards (getting a $1000 deposit with a 10% reserve requirement means you can lend out $900 of it, not that you can magically lend out $9000 that you don't have), and then it was all downhill from there.
There are a lot of relatively decent arguments that the US economy is in for a prolonged recession, but I would group the article with the crazy goldbug paulites rather than with legitimate, usually fairly well-reasoned economic criticism with which I disagree (Krugman, etc).
That actually isn't strictly true; you could loan out that 900, which gets spent by the person you loaned it to, and can then could be redeposited by the person who sold him something, in the same bank. And this can be repeated up until it asymptotes off, which (from memory), with a 20% reserve requirement, would occur at $5000. You can do the math on your own for a 10% reserve (I'm guessing it happens at $10,000, which minus the original $1000 is the author's $9,000).
What's really fun is that you can do this with anything, e.g. lawnmowers. I might own one, I lend it to Bob. Now how many lawnmowers are in circulation? Certainly I own one, I have an IOU for one lawnmower. And of course Bob owns one, he's mowing his lawn. If I swap out my lawnmower IOU for some cheesecake and a Tijuana Brass LP, now I'm creating currency and inflating the money supply, since really anything can be currency, ask all those people swapping around cell phone minutes.
I think this is confusing for currency because the IOUs look so much like the real thing.
sorry for the meta comment: but the above comment thread is why I think news.YC is the greatest at the moment. Compare this sort of conversation to reddit, or anything really. Doesn't compare.
Its a geometric series. In math: Let r=(1-reserve requirement) and Total = 1000 * sum(1-r^n,n=0,infinity) = 1000 * 1/(1-r)
Now I'm probably wrong with my indices because I'm a little confused about connecting my infinite sum to people running around at the bank. If I plut in .8 for r (the same as the comment above used, I get 1/(1-.8)=5, or $5,000 so I'm right that far. For 10% its: 1/(1-.9) = 10 or $10,000. So the author is right in numbers, but arguing against this would be ridiculous. How could any bank guard against this? Why would they want to?
Right, that assumes the proceeds of the loan are redeposited into the banking system. If instead the money remains in circulation or is otherwise kept in physical form, the multiplication stops.
The author has since added an italicized paragraph explaining that this is what he meant to write, but I think the original wording crosses the line from shortcut into misleading, because by the time it will have "the right to lend $9,000 to other people", the bank will have had $10,000 in deposits, not $1000.
Although it's a big house of cards, but since in today's age of almost everyone using the debit, credit & gift card instead of cold hard cash, it's very true reality. Also, it's the not the same bank, but the entire banking system as a whole that allows the money to "multiply". And todays reserve ratios are ridiculously small, in the 1% area.
First off, only idiots loan money without requiring the borrower to put up some collateral to cover most of the sum in the event of a default. Not even the Federal Reserve.
Second, reserve requirements are there to insure the institution can cover defaults at a modeled rate. The requirement is not to cover the entire amount of the loan in the event of a default, but ONLY the difference between the market value of the collateral against the loan and the principal of the loan.
So a bank with a $1000 deposit and a 1:9 capital ratio can, indeed, directly lend $9000 if their risk modeling and lending standards predict a sufficiently low default rate.
This is why accurate (and conservative??) modeling and subsequent pricing of risk is so very important to a fractional reserve banking system. Mis-priced risk => actual losses are greater than projected losses => insufficient capital to cover actual losses => bankruptcy.
Sprinkle in some 32:1 hedge fund leverage using crap mortgage paper as collateral and you have yourself a financial weapon with a very short fuse.
The most recent incarnation of mis-priced risk has been "houses ALWAYS go up in value", leading to AAA-rated mortgage-backed securities (MBS). Which is bullshit and we all know it. The institutions that bought this crap only held enough capital to cover their modeled default rate of AAA-rated bonds, rather than the (much larger) capital to cover defaults on the junk bonds this trash is really composed of.
The situation is actually worse than the author says. Those banks turn around and use the mis-priced MBS paper as collateral for even larger loans, and now the problem has REALLY been magnified. This goes 3 or more levels deep with some of the credit derivatives out there.
Edit: P.S. I think the pirate author guy is kind of a doomsday nutjob. I do not think the U.S. will collapse in a poof of logic.
If you believe that all money is just loans, then that 4% interest has to either to be defaulted on, or another loan has to be created to cover the original interest on a global scale. If you take out another loan to cover interest, then money will balloon to infinity. It's internal logic is consistent.
I'm an European and the US economy is holding some of my money hostage :-)
I have $8000 that I got from selling some stock options of mine. I let it remain in the US for a couple of months because I needed to get some information from my bank and never had the time to call them...
When the dollar started sinking, I decided to wait because the dollar has its ups and downs. BAD DECISION! Now I will lose 1/6 of the money when I transfer it to my local currency.
Wow. It started out quite well reasoned and then, making larger and larger leaps of logic, ended in "stock up on gold and ammunition". I found myself adjusting my tin-foil hat on a regular basis.
I think I liked them more when it was "Music was meant to be free".
I think dismissing the article as laughable only on the basis of the IP violation is an unnecessary insult to an otherwise well thought out article. Oppose it on the basis of what it argues for, not the (very light) rhetoric.
I'm not opposing it. It's just that articles like this are a dime-a-dozen lately. It sounded like any other, with the main distinction being a comical "This is what the pirate party is all about" line tacked on.
What about the unsaid scam of the day, that the US banks have actually tried to con other nations banks into paying for their crisis, by fraudulently selling 'financial products' that were in effect nothing more than black holes.
If you buy something that is unfit for the propose it was marketed, then that is fraud.
It is not the yuppies that decent people care about. A yuppie who's revenue goes down 20% will simply keep driving his BMW for another year before buying the next one. Nobody's (except luxury products manufacturers) heart is breaking for them.
But working class people who lose 20% of absolute revenue in a year? Out goes their health insurance, no more saving, and things get ugly pretty fast. And any society who ignores this deserves to go down.
You can judge a society most not by how it treats his most powerful members, but by how it helps the least powerful. And in a society as rich (in all senses), inventive and powerful as today's Western World, it is a pity that we cannot offer our least able dignity in their life. Economically difficult, you say? Give me a break.
