Updated: ‘Fractional-Reserve Banking Inherently Inflationary’ (QE Ad Infinitum)

Business, Debt, Economy, Federal Reserve Bank

It might seem obvious to follower of the Austrian School of economics that fractional-reserve banking “inevitably expands the money supply,” causing cycles of boom, bust and malinvestment. But the reptilian brains in Congress need someone like Dr. Joseph T. Salerno to explain to them the consequences of “issuing deposits not fully backed by cash.” This Salerno, whose lectures I enjoyed at the Mises Institute, has always done magnificently:

… when people deposit an additional $100,000 of cash in the bank, depositors now have an additional $100,000 in their checking accounts while the bank accumulates an additional $100,000 of cash (dollar bills) in its vaults. The total money supply, which includes both dollar bills in circulation among the public and dollar balances in bank deposits, has not changed. The depositors have reduced the amount of cash in circulation by $100,000, which is now stored in the bank’s vaults, but they have increased the total deposit balance that they may draw on by check or debit card by the exact same amount. Suppose now the loan officers of the bank lend out $90,000 of this added cash to businesses and consumers and maintain the remaining $10,000 on reserve against the $100,000 of new deposits. These loans increase the money supply by $90,000 because, while the original depositors have the extra $100,000 still available on deposit, the borrowers now have an extra $90,000 of the cash they did not have before.
The expansion of the money supply does not stop here however, for when the borrowers spend the borrowed cash to buy goods or to pay wages, the recipients of these dollars redeposit some or all of these dollars in their own banks, which in turn lend out a proportion of these new deposits. Through this process, bank-deposit dollars are created and multiplied far beyond the amount of the initial cash deposits. (Given the institutional conditions in the United States today, each dollar of currency deposited in a bank can increase the US money supply by a maximum of $10.00.) As the additional deposit dollars are spent, prices in the economy progressively rise, and the inevitable result is inflation, with all its associated deleterious effects on the economy.

Then there are the artificially low interest rates:

Fractional-reserve banking inflicts another great harm on the economy. In order to induce businesses and consumers to borrow the additional dollars created, banks must reduce interest rates below the market-equilibrium level determined by the amount of voluntary savings in the economy. Businesses are misled by the artificially low interest rates into borrowing to expand their facilities or undertake new long-term investment projects of various kinds. But the prospective profitability of these undertakings depends on expectations that bank credit will remain cheap more or less indefinitely. Consumers, too, are deceived by the lower interest rates and rush to purchase larger residences or vacation homes. They take out second mortgages on their homes to buy big-ticket luxury items. A false economic boom begins that is doomed to turn into a bust as soon as interest rates begin to rise again.
As the inflationary boom progresses and prices rise, the demand for credit becomes more intense at the same time that more cash is withdrawn from bank deposits to finance the purchase of everyday goods. The banks react to these developments by sharply raising interest rates and contracting loans and deposits, causing a decline in the money supply. Indeed the money supply may very well collapse, as it did in the early 1930s, because the public loses confidence in the banks and demands it deposits back in cash. In this case, a series of bank runs ensue that pushes many fractional-reserve banks into insolvency and instantly extinguishes their money substitutes, which had previously circulated as part of the money supply. Recession and deflation results and the binge of bad investments and overconsumption is starkly revealed in the abandoned construction projects, empty commercial buildings, and foreclosed homes that litter the economic landscape. At the end of the recession it turns out that almost all households and business firms are made poorer by fractional-reserve bank-credit expansion, even those who may have initially gained from the inflation.

MORE.

UPDATE (Feb. 20): QE ad infinitum. Federal Reserve and US government, a cog in the fractional reserve operation, buy up their own debt. The country is collateral. The purchases of government debt securities is known as “quantitative easing,” or QE ad infinitum.

The money mafia are easing to the tune of $85 billion in monthly bond purchases. If they’ve admitted to this much, you can be sure it’s much more.

The basis for debauching the coin? The Fed and his political masters assume that inflating the money supply and endless liquidity alleviate joblessness.

It’s the exact opposite.

The Fed’s latest shenanigans via Bloomberg:

Several Federal Reserve policy makers said the central bank should be ready to vary the pace of their $85 billion in monthly bond purchases amid a debate over the risks and benefits of further quantitative easing.
The officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes of the Federal Open Market Committee’s Jan. 29-30 meeting released today in Washington.
The minutes showed policy makers were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in a U.S. labor market burdened with 7.9 percent unemployment, with some saying an earlier end to purchases might be needed, and others warning against a premature withdrawal of stimulus.
“They’re changing the debate toward when to scale it down rather than debating the point where it suddenly ends,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. “With the economy looking more solid than they feared a few months ago, financial sector risks take on more importance.”

Rand Paul’s Rebuttal

Conservatism, Debt, Economy, Education, libertarianism, Political Economy, Republicans, Ron Paul

Rand Paul’s Tea party State of the Union 2013 rebuttal was the only speech worth listening to on that day. Even so, I found myself bristling at Rand’s philosophical compromises, as I went down the page and distilled the facts for you.

Rand Paul’s rose-tinted unemployment number: The junior United States Senator for Kentucky cited “official” unemployment figures, rather than real joblessness, which not even the U6 statistic covers.

Another bum note Rand sounded was on the “Balanced Budget Amendment”:

To begin with, we absolutely must pass a Balanced Budget Amendment to the Constitution!

It’s the sort of philosophical compromise his father would not have made. As this column observed in “Dead-End Debt Debate,” “what a balanced-budget requirement implies is that the government has the right to spend as much as it can take in; that it should be permitted to squander however much revenue—now there’s a nice word for taxes—it can extract from its enslaved wealth producers.”

Ron Paul would have demanded that entire departments be shuttered, not that the bums merely bring into balance what was stolen (taxes) and what is squandered (spending).

Another misstep saw Paul call for “ending all foreign aid to countries that are burning our flag and chanting death to America.”

No. End foreign aid, period.

As for “another downgrade of America’s credit rating”: It is not a bad thing because it is well-deserved. A downgrade is a must, as no serious spending cuts have been forthcoming.

Oy! And Rand Paul supports charter schools. Educational vouchers and charter schools are a species of the publicly funded system.

In any case, certain facts presented in Rand’s rebuttal should be pretty humdrum by now:

• “The US government is borrowing $50,000 per second.”

• “Over the past four years [BHO] has added over $6 trillion in new debt.”

• “Every debate in Washington is about how much to increase spending – a little or a lot.”

• “T]he $1.2 trillion sequester that [BHO] endorsed and signed into law … “doesn’t even cut any spending. It just slows the rate of growth.”

• “Even with the sequester, government will grow over $7 trillion over the next decade.”

• In essence, and “increase of $7 trillion in spending over a decade” is being “called a cut.”

• “[B]ig government and debt are not a friend to the poor and the elderly. Big-government debt keeps the poor poor and saps the savings of the elderly. This massive expansion of the debt destroys savings and steals the value of your wages. Big government makes it more expensive to put food on the table. Big government is not your friend. The President offers you free stuff but his policies keep you poor.”

• “Under President Obama, the ranks of America’s poor swelled to almost 1 in 6 people last year.”

• “Only through lower taxes, less regulation and more freedom will the economy begin to grow again.”

MORE.

UPDATED: Blade Runner Still Walking On Water

Celebrity, Crime, Criminal Injustice, Justice, Law, Pseudoscience, Psychology & Pop-Psychology, Race, South-Africa, Sport

A high-profile murder involving a class of people whose role in South Africa’s endemic crime is statistically insignificant occurred last week. The two wealthy white South Africans involved, however, will become a perfect foil for the hypocritical tele-twits of the West. The latter have said nothing about the carnage of crime in that country—and they’ll continue to say nothing meaningful at all.

Crime in South Africa should have been making news headlines across the world throughout South Africa’s overnight transition from minority to majority rule. It hasn’t. Blade runner Oscar Pistorius’ run-in with the law has occasioned the first such mention that I can recall by anchor-personality Megyn Kelly of Fox News, and her colleagues in the industry. (The killing fields of South Africa are dissected in “Crime, The Beloved Country,” a chapter in my book).

A statistical outlier, an anomaly—the murder of a (white) South African celebrity (Reeva Steenkamp) by another (Olympian Oscar Pistorius), allegedly—has newsmen in the West mentioning a subject they’ve so far submerged.

Steenkamp was a South African model. Pistorius is also a celebrity whose fame comes from being a tenacious (and talented) track-and-field annoyance. An annoyance, because most hardcore track-and-field fans want able and disabled Olympians segregated. (Yes, this is an intentional play on “loaded” words. Call the PC police!) The separation why? So as to allow fans (me) to enjoy the sport without the accoutrements of technology and the incontinent gushing that accompanies Pistorius whenever he makes a run for it.

In any event, how PC and TV perfect is this crime? (This or any other crime should never be called “a tragic circumstance,” as such vague language implies that bad deeds are invariably caused—never committed. And that they are caused by factors outside the perpetrators. (See “Rah-Rah For Rioters.”)

I wager that next, Anderson Cooper or Piers Morgan will call on the actress Charlize Theron to comment about the relevance of her pet campaign to stop violence against women in our former homeland, and its relevance to this case.

There is no relevance. Violence in the “Rambo Nation” is unidirectional: black on black and black on white. Violence against women—at least the kind that causes more than hurt feelings—follows the same pattern.

Meanwhile, the blade runner is still walking on water. Oscar Pistorius is receiving “overwhelming support” from his fans. Or so his agent informs the fans and the press.

UPDATE: FROM the Facebook thread. It’s just as I said. The Guardian is turning a statistical anomaly in this group (well-to-do whites) into a generic statement about violence against women in South Africa.

Desmond Tutu NOT An Example Of Black Privilege

Affirmative Action, Israel, Neoconservatism, Race, Racism, South-Africa

I am not sure why the authors of Black Skin Privilege and the American Dream, reviewed by philosopher-pundit Jack Kerwick on FrontPage Magazine, picked on Desmond Tutu as an example of black privilege in South Africa.

It must be an authorial tic peculiar to neoconservatives, and applied to anyone with an anti-Israel position, for which Archbishop Tutu is famous. It is also typical of the neoconservative’s reflexive ahistoric approach, where a proposition or an idea (black privilege) is applied without nuance, to any and all annoying blacks (Tutu is that alright).

Horowitz and Perazzo even show that black skin privilege transcends continents. Alluding to South Africa’s Bishop Demond Tutu, they write: “What white spiritual leader could support the torture-murders of South African blacks, compare Israel to Nazi Germany, and still be regarded as a moral icon? A black cleric like Bishop Desmond Tutu can.” (Indeed, as occasional Front Page Magazine contributor and former South African resident Ilana Mercer amply demonstrates in her, Into the Cannibal’s Pot: Lessons for America from Post-Apartheid South Africa, the new South Africa is black skin privilege on steroids.)

(From “Black Skin Privilege and the American Dream” by Jack Kerwick.)

I don’t think Desmond Tutu is an example of black privilege. He supports it, but doesn’t exemplify it.

If anything, the elderly Archbishop, whose inauguration I attended and with whom my father and I took afternoon tea many decades back, embodies the old-style, old school African man. Tutu grew up in wretched poverty, received—and gladly accepted—a decent education courtesy of the Church, and worked his ministry so hard as to reap the rewards. (In “Into the Cannibal’s Pot: Lessons for America from Post-Apartheid South Africa,” I discuss the wonders the white-run churches had done in South Africa, as do I mention what was for me a memorable meeting with the Archbishop. From that occasion I took away that he was fond of my father and respectful of dad’s Jewish faith and scholarship. How good an equalizer were some schools in the old South Africa? You be the judge. Tutu and I, and tens of thousands of other Africans, belong to the same alma mater: UNISA.)

Sure, Tutu is a left-liberal. But to me, as I said in “King Tut(u) Not So Terrific,” his impiety stems from never having piped up about the ethnic cleansing of rural whites, Afrikaners mostly, from the land in ways that beggar belief. Saint Mandela has also remained mum about these Shaka-Zulu worthy murders.

And so have our neoconservatives!

Witness the authors of Black Skin Privilege and the American Dream, who, it would appear, protest Tutu’s alleged support for the “torture-murders of South African blacks” (by which I am told they meant white South Africans), but say nothing, seemingly (just like Tutu), about the targeted slaughter of whites in South Africa, and then only when it’s politically safe to do so. (Watch Barely a Blog for commentary about Oscar Pistorius.)

Jack Kerwick, of course, is correct (and most kind) to subtly remind neoconservatives that it is “the new South Africa [that] is black skin privilege on steroids” (and that a rightist has already plumbed the depths of this topic).