Americanly Yours

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How An Economic Recovery Could Become An Economic Catastrophe

May 21, 2010 By: Phred Category: Uncategorized

My friend, Jim Davidson sent me this chart yesterday.

Ok, clearly the chart above indicates that something unprecedented and drastic has been happening in our banking system for the past two years.  But you are likely asking “what does this mean?”

The United States’ banking system is a fractional reserve system, meaning that banks are not required to hold 100% of the money deposited.  Currently, the reserve requirement (the percentage of deposits that banks are required to maintain) is 10% for checking accounts.  Thus, if you were to deposit $100 of your money into a checking account, the bank would legally be required to keep $10 and could lend out $90 to those borrowing money from the bank.  Any amount they kept on hand above $10 would be considered “excess reserves.”

For those interested, the data used to make the above graph can be found here.  A quick glance at either the data or the graph shows that for most of the past 50 years, banks have maintained reserves at levels very close to the levels mandated by the Federal Reserve.  On August 1st, 2008, banks maintained excess reserves of $1.875 billion.  One month later, excess reserves shot up to $59.482 billion.  On October 1st, excess reserves equaled $267.159 billion, reaching $558.821 billion on November 1st, and $767.332 billion on December 1st.  On April 1st, 2010 (the last date for which data is available), excess reserves totaled just over $1.05 TRILLION, or around 1000 times higher than they were 20 months earlier!

You are likely still asking what all this means.


What this means is that banks are keeping reserves on hand above and beyond the ratios required by the Federal Reserve.  Banks are likely doing this for several reasons:

1)  The banks know that many of they loans they initiated over the past several years are likely to default.  These loans were purchased by these banks using the cheap credit made available by increases in the money supply and low interest rates.  Thus, banks are keeping the “excess” capital on hand so that they can pay the interest on the money that they borrowed to make these faulty loans–even if there is a large number of loan defaults.

2)  This ties in with the reason above, but these banks are worried about the consequences of asking for another large bailout from American taxpayers.  The government bailed out these banks a year and a half ago, despite widespread public opposition and used the rationale that doing so would save the economy.  However, since this bailout, the economy has only worsened.  The banks know that it is unlikely that the American people would be as willing to allow their government to hand rich bankers taxpayer money again.

OK, so the banks arent lending right now, but what does this mean?

There is another major reason why the banks arent lending: we are in the midst of a pretty serious recession.  No one knows how long it will last, and my guess is that no one really knows just how bad it is right now.  With the exception of the Austrian Economists, not too many economists out there even say this crisis coming–much less lasting this long.

With so many people unemployed, so many businesses failing, and so few businesses expanding (or new businesses being opened), there just isnt a massive demand for loans.  This gives banks another reason to continue to hold “excess” reserves.

But, the economy is slowly starting to pick up.  As this happens, banks will begin to loan out more money and will eventually start to lower their reserves until they reach levels of excess reserves near the historical rate (in other words, near zero).  In fact, it is already happening:  On February 1st, excess reserves were $1.162 trillion, on March 1st, excess reserves were $1.120 trillion, and on April 1st, excess reserves were $1.05 trillion.  In other words, banks decreased their excess reserves by about 9.6% between February 1st and March 1st.

As the economy recovers and banks make additional loans, this will increase the supply of money in the economy.  An artificial increase in the supply of money is, simply put, not good.  When there is more money in the economy chasing after similar amounts of goods and services, the result can be nothing else but an increase in prices (relative to what prices would have been without the increase in the money supply).

The effects of the increases in lending brought about by an economic recovery will increase the money supply by much much more than $1 trillion.  As mentioned above, under our fractional reserve system, banks are only required to hold 10% of checking deposits and are able to lend out the remaining 90% to borrowers.  However, the process doesnt stop there:  if you deposit $100, the bank holds $10 and loans out $90 to someone else.  When that person deposits their money in a checking account, their bank is then able to loan out $81 while only holding $9, and so on.  As this process continues, banks effectively create (out of thin air) over 9 times the money that is held in their vaults and your $100 becomes nearly $1000 in the economy:

Thus measure of money supply is known as the M2 money supply.  Thus, if banks return to their historical activities and maintain reserves at a level just above the reserve requirement rate, the result could be an increase in the M2 money supply of around $10 trillion.  Currently, the total M2 money supply is just over $8.4 trillion, thus if banks start to lend out their excess reserves, the M2 money supply will more than double.

The implications of this are quite sobering.  If the economy does not improve and continues to muddle along, things will be bad.  Unemployment will remain high or possibly even creep higher, the stock market will continue to drop, people will continue to suffer and so on.

However, if the economy shows marked improvement and begins to accelerate, things will be much worse.  At first, this might seem counter intuitive, but we must remember to take the above information into account.  When the economy improves, banks will start to lend out their “excess” reserves.  Because of the fractional reserve nature of the United States’ banking system, each dollar that banks hold in excess reserves has the potential to become nearly $10 when loaned out.

At first, this will make it look like the economy is growing at a very fast rate.  After all, the newly created money is being spent by lenders to purchase things that werent being purchased before.  The increased demand for these goods raises their prices (and initially the profits of the businesses selling these goods).  This may result in a rise in wages for the employees in that sector of the economy.  However, when monetary inflation occurs at a rate as high as the rates we are likely to see, this phenomena spreads throughout the whole economy.  Thus, prices and wages will generally rise throughout the economy.

Anyone who thinks that this is a good thing is fundamentally wrong.  We often are presented with the argument that increasing the money supply increases incomes and is necessary because without such increases “there wouldnt be enough money to go around.”  As economist Tom Woods wrote in his best selling book, Meltdown, “It is to misconceive the nature and purpose of money completely to think its supply needs to expand in order to allow more transactions to take place.”  In fact, in a system with a stable money supply, “prices fall over time and the value of money rises.”  The reason for this is that “as output increases, the monetary unit simply gains in purchasing power.”

Monetary inflation (and the resulting price inflation) does not mean greater standards of living–the opposite is true.  What monetary inflation does do is destabilize the economy, increase the inequality of wealth distribution, and make society less better off than it would be under a stable monetary system.

Just ask the citizens of Zimbabwe if the massive increase in their nation’s money supply have made them better off.  In 1980, each Zimbabwe dollar was worth $1.59.  After 30 years of constantly increasing the money supply, their economy is in shambles, and their money is worth less than the paper it is printed on.   “In March 2007 Zimbabwe’s inflation rate passed 50% a month, a good threshold for defining “hyperinflation” and equal to 12,875% a year. Since then, it’s gotten much worse.” In late 2008, their price inflation rate reached the incomprehensible rate of “80 billion percent a month. That means around 6.5 quindecillion novemdecillion percent a year–or 65 followed by 107 zeros. To get a handle on it, realize that it’s equivalent to inflation of 98% a day. Prices double every 24.7 hours.”

Well then, if the argument that printing new money makes everyone in the economy better off has even a slight grain of truth in it, then Zimbabwe must be among the richest country in the world!  After all, Zimbabwe is following the economic philosophy of the “brilliant” John Maynard Keynes and his disciples who have argued that increases in the money supply bring about prosperity by accelerating spending.  Everyone knows that this is not the case, however.  Zimbabwe is among the poorest nations in the entire world and recorded a 94% unemployment rate last January.

Does this same fate await America?  Lets just say that something like this is possible.  The Federal Reserve has been printing money for too long and has accelerated these practices in recent years and months.  With a low reserve rate of only 10%, the Federal Reserve is just asking for trouble; when the economy recovers, things have the potential to spiral out of control quickly and result in a massive and destructive hyperinflation.

Yes, this can be slowed or even stopped.  But, before you get your hopes up, ask yourself  if the US government has ever learned from its mistakes or the mistakes of others.

Americanly Yours,

Phred Barnet

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President Obama’s Theft Of Chrysler

May 11, 2009 By: Phred Category: Uncategorized

We all knew it would happen. Chrysler has declared bankruptcy. Big surprise.

The government has announced that Chrysler wont be paying back the $7,200,000,000 [7.2 billion] in aid that it received. $3,200,000,000 [3.2 billion] of that money was given to Chrysler just last week–its hard to believe that the administration was ever planning on getting this money back.

But, in yet another case of the government not learning its lesson, it has actually pledged to “loan” Chrysler another $4,700,000,000 [4.7 billion]!  And on top of this, Chrysler is planning on asking for an additional $1,500,000,000!

What is going on here?

The government has received an 8% in the bankrupt company–which it claims is compensation for the taxpayers for risking taxpayer money.  The whole company isnt worth the amount of money that the government has loaned to Chrysler!  Chrysler is bad news and has been for years.  Did you know that Diamler AG actually paid Cerberus nearly $700,000,000 for Cerberus to take over the company in 2007?

Heres an idea, how about you compensate us by not wasting our money on bailouts!

But it gets worse.  President Obama’s administration has allegedly “strong armed” Chrysler’s investors to force them into agreeing to a deal.


“The sources, who represent creditors to Chrysler, say they were taken aback by the hardball tactics that the Obama administration employed to cajole them into acquiescing to plans to restructure Chrysler. One person described the administration as the most shocking “end justifies the means” group they have ever encountered.  Another characterized Obama was “the most dangerous smooth talker on the planet- and I knew Kissinger.”  Both were voters for Obama in the last election.

One participant in negotiations said that the administration’s tactic was to present what one described as a  “madman theory of the presidency” in which the President is someone to be feared because he was willing to do anything to get his way. The person said this threat was taken very seriously by his firm.”

The Wall-Street Journal reports a similar story–and also reports the lack of media coverage about this.

Basically, many bondholders have agreed (willingly or after being forced) to give  up their claims.  Many of their positions in Chrysler’s debt have been wiped out because of this deal.  These bondholders were individuals, companies, and pension funds who loaned Chrysler money, risking their own wealth to help Chrysler through a bad situation.  If Chrysler’s bankruptcy is accepted by the judge, these lenders will lose the money they loaned Chrysler.   This is nothing more than the government stealing money from one group and handing it to another.

In the future, lenders will think twice about loaning money to aid struggling businesses, especially if there is a chance that the government will cancel their loans.

And that group that got the handout just happens to be the UAW.  Under the administration’s plan, restructuring, the UAW now owns 55% of Chrysler.  The US and Canadian governments also own large stakes in the company.  The UAW endorsed President Obama and actively encouraged its members to vote for him.

But what sunk Chrysler in the first place?  If you guessed the UAW, you guessed correctly.  According to Chrysler’s own numbers from 2007, their average worker cost the company $75.86 per hour.  Around the same time, Toyota’s workers were costing the company about $40 per hour.

President Obama’s administration stole money from bondholders and equity from Chrysler’s investors and gave it to the UAW.  This is thievery and should be condemned as such in the strongest terms possible.

Americanly Yours,

Phred Barnet

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Audit The Federal Reserve

May 01, 2009 By: Phred Category: Uncategorized

Congressman Ron Paul has proposed an interesting bill in the House of Representatives.  No, it isnt another “crazy” proposal from the Congressman, but rather a very sensible one.

If passed, this bill would require that an audit of the Federal Reserve take place before December of 2010.

The Federal Reserve was established in 1913 and has never been subjected to a government or independent audit.   The Federal Reserve controls the Nation’s money supply and has the power to print new money as it sees fit.  It also controls interest rates, and therefore has a great deal of influence (to say the least) on our economy.

It is also a private corporation, owned by its members–the same large banks who are being blamed for the current financial crisis.

Requiring an audit of this institution is just plain common sense.

I do not see how any sensible, reasonable person could oppose this on any grounds.

This bill now has 112 cosponsors in the House.  The number is growing every day.  This bill is also getting bipartisan support.  One of the cosponsors is California Representative Lynn Woolsey.  She is vice-chairman of the Congressional Progressive Caucus and was the first House of Representatives member to call for withdrawal from Iraq.  Georgia Representative Tom Price, a staunch conservative is also a cosponsor.  This bill also has the support of plenty of other prominent Democrats and Republicans.

I would not be surprised if President Obama threw his support behind this bill.  The President claims to be a very big proponent of transparency.  Supporting this bill would be a great way to prove it.

From Congressman Paul: “Since its inception, the Federal Reserve has operated without sufficient transparency or accountability to the American people. In fact, current law specifically excludes the Fed from audit or real congressional oversight. No government agency has such an utter lack of sunshine.

The Federal Reserve has created and dispersed trillions of dollars in response to our current financial crisis. Of course, I am among the most outspoken critics of the bailouts, but Americans across the nation, regardless of their opinion of the TARP program, want to know where that money has gone and exactly how much has been spent.”

There is a similar bill now being proposed in the Senate.

Please click here to email and/or call your Senator, Representative, President, and/or Vice President.

With your help, an audit of the Federal Reserve will soon take place.

Americanly Yours,

Phred Barnet

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April 22, 2009 By: Phred Category: Uncategorized

To all conservatives (and especially those in the Republican Party),

You probably enjoyed yesterday’s post quite a lot.  You have probably enjoyed many of my posts so far.  But that is because they have focused almost exclusively on economic issues.

The term conservative is far more difficult to define than liberal.  Almost 25% of registered Democrats consider themselves to be conservatives.  Then there are those in the Constitution Party who declare that they are the real conservatives.  Of course, there is also the crowd that calls former President George W. Bush a liberal.

Who is a conservative?  Is John McCain a conservative?  Is George W. Bush?  Is Ron Paul?  Is Mitt Romney?  Is Sarah Palin?

Does conservativism seek to maintain the status quo?  Or, does it seek to return to the “good old days?”

Just as with liberals, there are a range of people who are considered conservatives.  I am writing to the broadest range of them.  This is much more difficult to do with conservatives than with liberals.

You claim to be the party of small, limited government.  Yet, each Republican administration that has come to power following a Democratic administration has increased the size and scope of government by more than the Democratic administration preceding it.  I have little doubt that if a Republican candidate were to defeat President Obama in 2012 or win in 2016, he or she would increase, rather than decrease the power of the federal government.

In the months after 9/11, President Bush’s approval ratings reached 90%.  Did the Republican Party use its new political capital to eliminate wasteful programs?  Did it use this power to create any committees to review proposals for the reform or elimination of Social Security, Medicare, or any other significant government program? No, in fact, you pushed for—and got—a large expansion of Medicare. The No Child Left Behind debacle which was an extremely expensive bill which was pushed by conservatives and Republicans and gave the Federal government much more power over education.

You claim to be the defenders of the Constitution.  You rail against liberals for violating the 2nd and 10th Amendments.  True, they do ignore those amendments.  But you do your fair share of ignoring them too.  President Bush’s warrantless wiretapping program was an unconstitutional violation of the 4th Amendment.  And lets at least be consistent on the 4th Amendment.  When President Bush and his team pushed for the monitoring of phones, you called it necessary for the protection of America.  Yet, when Democrats and President Obama want similar powers over the internet, you cry foul.  As if your defense of warrantless wiretapping didnt set this up.

And while we are on the Constitution, you have also ignored the 10th Amendment and used it for your own political purposes.  Whether you support or oppose abortion, the federal government has no Constitutional basis for setting abortion policy.  The same is true for gay marriage.  The 10th Amendment gives this power to the States, where it belongs.  This power was delegated to the States so that divisive social issues would not be played out on the national arena.

How can those who claim to support limited government continue to push for so much expanded power of the government? The simple answer here is that many of those who claim to be opposed to government control are actually only opposed when their side is not in control.

You claim to be the party which supports freedom.  You claim to be the party of personal responsibility.  Yet, you have prosecuted an endless war on drugs.  Your policies have sent millions of your fellow citizens to prison for offenses which harmed no one but themselves.  I know that the Democratic Party has not exactly come out in favor of legalization or decriminalization of drugs, but the Republican Party has been relentless in promoting the prosecution of drug offenders.  [Plus, President Obama has made some great moves in this area.  More on that in a future article.]

You rail against President Obama for supporting bailouts and stimulus, but remember that the first stimulus bill was passed last year and signed by President Bush.  The TARP bill and several other bailouts, including that of AIG were all pushed through by President Bush.  I know that many of you have been against these moves since the beginning, but plenty of you were not and did not take a stand until President Obama took office.

You have supported economic populism, creating and continuing policies which have contributed to the current financial crisis.  Using the government’s power of regulations over financial companies to force banks to lend to those who couldnt afford to buy homes is exactly what caused this mess.  Yes, this practice was made government policy under President Clinton, but Republicans controlled Congress then–and did for another 8 years.

You criticize the Democrats for supporting inefficient social welfare programs which you say infringe on the free market.  Yet, you support corportate welfare.  You have given American companies tax breaks to ship jobs overseas.  Yes, outsourcing is a good, natural step that our economy needs to take, but the government should never subsidize private companies, especially for the purpose of eliminating American jobs.

Previously, I wrote that I found “it ironic that the same people who criticized President Bush for every little thing that he did–whether it was right, wrong, or unimportant have now resorted to questioning the Patriotism of people like me for simply disagreeing with President Obama.” You conservatives probably loved that comment.  But when did this start?  Anyone who criticized the previous administration was criticized as unpatriotic, un-American, or was accused of being soft of terrorists.  The medicine doesnt taste so great when you have to take it.

Americanly Yours,

Phred Barnet

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Withdraw Your Money On April 15th

April 09, 2009 By: Phred Category: Uncategorized

I have already mentioned that on April 15th, there will be “Tea Parties” across the country to protest things like the bailouts and so-called stimulus packages.  Other people will be protesting federal income taxes and the federal governments intrusion of States rights.

I will be attending the protest at the Georgia State Capitol Building.  There are hundreds of such protests across the country.  As I said earlier, organizers are expecting to have at least 5,000-10,000 people at the Atlanta protest meaning that there could be hundreds of thousands–if not more people attending these protests nationwide.

Some people may not be able to attend the protests for whatever reason.  I have come up with an idea that will still allow you to participate.  My idea is simple:  I urge everyone who banks at a government owned bank to remove your money from that bank–ask for cash–on or slightly before April 15th.  The banks owned by our government are listed here.

Withdrawing money from these banks, at least temporarily, will show the government how powerful the anti-socialism movement is.  No, this wont collapse the banking system, but it will send a strong message.  For each dollar taken out of banks, roughly 12 dollars is removed from the system.  According to FDIC guidelines, a bank is considered to be “adequately capitalized” if it has only 8% of its deposits on hand.  A massive withdrawal of money from government owned banks could cause many of these government owned banks to fall below this 8% threshold, causing great embarrassment to the administration, while demonstrating our power to those in charge.

Its just an idea, but I hope that you’ll pass it on.

It is time that we stand up and take our country back.

Americanly Yours,

Phred Barnet

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