Monday, July 26, 2010

Age of low interest rates, piles of cheap money sitting in banks – time to get out of cash?

The Death of Paper Money

''People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money. "Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Posted by hpwatcher @ 07:52 AM (2167 views)
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11 thoughts on “Age of low interest rates, piles of cheap money sitting in banks – time to get out of cash?

  • The media have a very definite role in these crucial stages of the downturn.

    It is becoming apparent that despite over target, rising inflation and better than expected GDP figures, the Bank of England wants to restart quantatit quantitita … money printing. Ostensibly this is in order to ‘lock in’ the recovery but actually it is to keep bank asset values high and rising (residential mortgage book).

    The media have to point out that during these times of austerity, our central bank should not be throwing billions to bankers. There should be bold images in papers, pictures of Mervyn King tigtening his belt with one hand, tipping a wheelbarrow full of cash to bankers with the other.

    In short, more of this:

    and this:

    and this:

    If the media doesn’t do its bit, we’ll find ourselves in hyperinflation in no time, egged on by central bankers’ self interest and homeowners economic NIMBYism.

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  • actually it is to keep bank asset values high and rising

    Absolutely right, because housing and the releted services is now the chief British product; on which the economy depends.

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  • stillthinking says:

    Buying a rare expensive rare book about the death of paper money is a nice irony.

    Reply
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  • paul said…The media have a very definite role in these crucial stages of the downturn

    Recaptcha: Sky unaware

    Couldn’t make it up!

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  • Central banks printing fiat money, then charging interest on it to the taxpayer as debt has been a very lucrative business historically.

    Problem, Reaction, Solution is the key to the volt. Simples, when you have your head straight.

    Recap – moonshine things:

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  • re Paul’s point about the distinction between supporting recovery in the real economy and keeping bank asset prices high: – credit conditions are improving for speculators and bubblemakers but deteriorating for households, consumers and small businesses. The shadow banking system (hedge funds, private equity, SIVs, conduits and OTC credit derivatives, all for the purpose of expanding leverage and balance sheets) is being revived. These guys are taking advantage of low rates and easy terms to fund corporate bonds, stocks and mortgage-backed securities but in the US, for example, bank lending to companies and consumers continue to shrink at a rate of nearly 5 per cent per year. While the real economy remains depressed,,offering limited opportunities for banks, securitisation and derivatives enable banks to post record profits.

    But the distinction between supporting the economy and supporting bank assets is at its most stark in the austerity measures imposed on countries in order to support banks’ gilt portfolios. The ECB’s QE (buying Greek etc. bonds) is purely for this purpose.

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  • Icarus,

    Is the shadow banking system really roaring ahead? According to the link I posted earlier (“Credit deflation with price inflation”), securitisation has stopped dead in the last six months. In their words:

    “First, securitization of UK consumer, mortgage and business debt has all but collapsed. Net-net, there haven’t been any sizeable securitizations of UK bank lending for six months running – the longest period since 1998.”

    I’m not really sure what’s happening any more!

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  • drewster – sorry about the late reply. It’s worth a look at a NY times article for an American perspective. There are signs there of a rebirth of shadow banking, See

    http://appraisalnewscast.com/2010/07/14/survey-shows-credit-flows-more-freely/

    “A new quarterly survey of lending by the Federal Reserve found that hedge funds and private-equity funds are getting better terms from lenders and that big banks have loosened lending standards generally in recent months……..The new survey also showed demand rose for funding high-grade corporate bonds, equities and residential mortgage securities ….Two-thirds of dealers (securities dealers at the biggest financial firms) said hedge funds in particular pushed harder for better rates and looser nonprice terms, and they said some of the funds got better deals as a result….(but) the funding market for key consumer loans remained under stress.”

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  • Interestingly Hitler created money out of thin air when he came to power, however he used the money for directed government expenditure on roads and infrastructure and expanded the productive economy. No inflation at all resulted.
    The Weimar government created currency due to the demand for marks from forex speculators(everyone was short selling the mark due to reparations). They created hyperinflation.

    Our government is buying its own debt(and hence funding its expenditure) via the banking system by creating money through QE mainly due to t the speculative lossses of the banking system.

    Draw your own conclusions.

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