ninety years ago

Jul 2019
29
Pale Blue Dot - Moonshine Quadrant
#3
I doubt much has changed in a fundamental sense. We are still under the assumption that the proper response to too much credit and debt is more credit and debt. That blew up in 1929 and there are some knowledgeable people worried today.

Policy decisions in the United States resulted in an unprecedented expansion of credit during WWI that resulted in very large debt loads in Europe – especially England and to a lesser, but still large, degree in France. J. P. Morgan did quite well however.

After a sharp, but brief depression in 1920-21 credit expansion exploded again during the 1920’s as easy credit allowed Americas to loan huge amounts of money internationally, often to Germany so it could pay reparations to France and England, who often used that money to repay their war debt to the US.

The Dawes and Young Plans were formal, ultimately unsuccessful, attempts to manage the madness in the bond and stock markets. The whole thing was little more than a civilization-wide shell game that collapsed in 1929.

The source of that madness in the markets, then and now, is controversial. The cause(s) of “business cycle” is still a source of contention as are the reasons what some cycles are so much worse than others.

John Maynard Keynes labeled the cause of the business cycle “animal spirits” while Alan Greenspan later called it “irrational exuberance” of the market. Federal Reserve Chairman William McChesney Martin made an analogy with inebriation when said in the February 2, 1970, Time Magazine that: “I’m the fellow who takes away the punch bowl just when the party is getting good.”

Modern mainstream economists often prefer to call it exogenous “liquidity shocks” as if something outside the economic system was the culprit and my bartender says: “The Boogie Man is to blame.”

But a brief perusal of public officials who are implementing credit policies suggest that some actually understand, at least with hindsight, that on some level that credit expansion is deeply involved. Other commentators seemingly exhibit deep misunderstandings.

Examples:

Annual Report of the Federal Reserve, 1917: “The discount policy of the board was to maintain rates in harmony with the low interest rates borne by Government loans - Annual Report of the Federal Reserve, 1917.”

Annual Report of the Federal Reserve, 1918: “The discount policy of the Board has necessarily been coordinated…..with Treasury requirements and policies, which in turn have been governed by demands made upon the Treasury for war purposes… The Board recognizes its duty to cooperate unreservedly with the Government to provide funds needed for the war.”

Annual Report of the Federal Reserve, 1919: “…an unprecedented orgy of extravagance….overextended business and general demoralization of production and distribution……Deflation could not have been long deferred.”

Adolph C. Miller, founding Federal Reserve Board Governor on February 26, 1919: "The most serious part of inflation is, after all, the aftermath. We sow the wind to reap the whirlwind. Somehow or other we have got to come down off the perch.”

New York Federal Reserve President Benjamin Strong, February 6, 1919: “If inflation continues…the liquidation will be arrested and our later troubles will be the greater...”

"I am going to give a little coup de whiskey to the stock market” - New York Federal Reserve President Benjamin Strong to French economist Charles Rist at the Inter-Central Bank Conference in July 1927 at the height of the stock market frenzy.

Adolph C. Miller, founding Federal Reserve Board Governor writing in 1931 about Strong’s 1927 burst of monetary expansion (the coup de whiskey): "It was the greatest and boldest operation ever undertaken by the Federal Reserve system, and, in my judgment, resulted in one of the most costly errors committed by it or any other banking system in the last 75 years…I am inclined to think that a different policy at that time would have left us with a different condition at this time.”

Beardsley Ruml, Chairman of the Federal Reserve Bank of New York in a January 1946 article in American Affairs Magazine entitled Taxes for Revenue are Obsolete: "The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity.

It follows that our Federal Government has final freedom from the money market in meeting its financial requirements.”
We are living in today in what Ruml thought was the government’s “final freedom from the money market.

Previous Federal Reserve Chairman Arthur Burns (who did not take away the punch bowl in the Carter era) in the Per Jacobsson Lecture, Belgrade Yugoslavia September 30, 1979: "My conclusion that it is illusory to expect central banks to put an end to the inflation that now afflicts the industrial democracies does not mean that central banks are incapable of stabilizing actions; it simply means that their practical capacity for curbing an inflation that is continually driven by political forces is very limited."

President of the New York Federal Reserve Anthony Soloman on, April 12, 1984: "But some seem to be suggesting that we get lower interest rates and their attendant blessings without progress on the fiscal front. The “solution” they seem to be proposing is much faster growth in money engineered by a more expansionist monetary policy...In my view such a policy would be nothing short of calamitous. Such a policy would represent precisely the combination of budgetary disorder and monetary complicity that has produced most of the world’s classic examples of runaway inflation.”

Federal Reserve Chairman Alan Greenspan in August 1990: “Those who argue that we are already in a recession . . . are reasonably certain to be wrong.”

Federal Reserve Chairman Alan Greenspan in January 2000: "Indeed, our goal, in responding to the complexity of current economic forces, is to extend the expansion by containing its imbalances and avoiding the very recession that would complete a business cycle.”

Future Federal Reserve Chairman Ben Bernanke to the National Economists Club November 21, 2002: "We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Federal Reserve Chairman Ben Bernanke in November 15, 2005: "With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly."

Federal Reserve Chairman Ben Bernanke on May 17, 2007: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

Federal Reserve Chairman Ben Bernanke on June 5, 2007: "We will follow developments in the subprime market closely. However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."

Federal Reserve Chairman Ben Bernanke on October 31, 2007: "It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions."

Federal Reserve Chairman Ben Bernanke on June 3, 2009: "The Federal Reserve will not monetize the debt.”

At the risk of running into current events, it would appear that, despite the clear lesson of history, more credit (and thus debt) is still thought to be the proper response.
 
Likes: Edratman
Jul 2019
29
Pale Blue Dot - Moonshine Quadrant
#5
but today , it's different !
everything is just fine and under control
of the top of my head I cannot think of a country with more than 100% debt to GDP who made it to safety
beside the US after WW2 and that was because the whole world was broken and needed US products

https://www.usdebtclock.org/world-debt-clock.html
I agree with this - my point was that the approach is unchanged but the implications are radically different since the credit card would appear to approaching its limit.

I think I read that today 25 cents of every dollar the federal government spends is borrowed.
 
Apr 2010
34,429
T'Republic of Yorkshire
#6
Likes: sparky
Jan 2017
4,710
Sydney
#7
" I think I read that today 25 cents of every dollar the federal government spends is borrowed "
that's not quite accurate
the Congressional Budget Office numbers are 23.19% of which 9% are to pay the interest on past borrowing ( rising...fast ! )
 
May 2018
119
Houston, TX
#8
I agree with this - my point was that the approach is unchanged but the implications are radically different since the credit card would appear to approaching its limit.

I think I read that today 25 cents of every dollar the federal government spends is borrowed.
I have always wondered (naively I am sure) --- to whom do nations (in this case the U.S.) owe their national debt (assuming they have one}? Could the lender ever 'call in the loan'? Have we 'borrowed' from ourselves? I get confused by this. And almost flunked the Economics course in college. :rolleyes:
 
Likes: Futurist
Jan 2017
4,710
Sydney
#9
Here is the debt as it stand
Here’s who owns a record $21.21 trillion of U.S. debt


this is the last statistics of who is buying today
the rather high number for Luxembourg is due to their banks acting as intermediaries
the biggest seller turn out to be the United Kingdom
The Fed - Foreign Transactions in Securities, July 2019

one should not confuse government debt with private debt , the debt clock above make the distinction
Ireland has a public debt quite reasonable but its private debts are crippling
 
Likes: Futurist
Jul 2019
29
Pale Blue Dot - Moonshine Quadrant
#10
I have always wondered (naively I am sure) --- to whom do nations (in this case the U.S.) owe their national debt (assuming they have one}? Could the lender ever 'call in the loan'? Have we 'borrowed' from ourselves? I get confused by this. And almost flunked the Economics course in college. :rolleyes:
The debt is owed to the bond market (excepts what the Federal Reserve is sitting on) and the game will hang together only as long as the bond market believes American can be taxed to continue pay that debt. The day that belief dies it is Katy Bar The Door.

One thing I am curious about is if the FED takes interest rates negative, will the federal, state, and local governments be paid to borrow?