softwareGuru

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  1. Confusion about fractional reserve banking

    The banker and depositor do not own the same real property. The money deposited in the bank is a loan to the bank -- that is not some fraud or sleight-of-hand, but the standard accounting treatment. You should think of a fractional-reserve banks as being closer to a mutual fund. The key difference is that the owners of the fund with a multi-layered capital structure: the bank owners put in reserves that take the first risk, traditionally bank owner's personal capital was a second layer, then come buyers of bank bonds, and finally those who have lent the bank money by making deposits. This is the traditional structure -- a free-market may see a more varied structure evolve. A fractional reserve bank means the amount owed to depositor is not backed by 100% gold etc. However, they may still be backed more than 100% by real assets. Depositors pool their gold, and a large chunk of it is lent out to people who want to buy (say) homes. Those people borrow, and the banks gets a mortgage on the house. In terms of real goods, the house now backs a part of the deposits. Legally, it should not be much different from a depositor making a loan to someone who wants to buy a house. Of course, it is not practical for a depositor to do this himself. Pooling money via a bank facilitates the process, and this allows a depositor to earn interest on his funds instead of simply keeping them as a sterile store of value. Through a chain, the house actually becomes a store of value for the depositor. However, the depositor's relationship is as a creditor. The bank owes him money and the mortgagee owes money to the bank. As part of its normal functioning, the bank keeps a certain amount of funds on hand, to pay out depositors who want their money. If the bank claims to keep 100% on hand, and do not, this is fraud. If they claim to keep at least 20%, and do so, there is no fraud. However, the terms of their agreement with their depositors ought to foresee a condition where the withdrawals exceed this reserve, and ought to specify how such a situation will be handled. This does not preclude 100%-reserve banks. There will also be a need for pure bailment, particularly for large-value accounts. A good book on early English banking is Walter Bagehot's "Lombard Street" (http://www.gutenberg.org/ebooks/4359)
  2. Confusion about fractional reserve banking

    In a properly-run fractional reserve bank, the amount in your bank account, the checks a customer writes on a bank and the notes issued by a bank are not money. They are credit. They are more than 100% backed by real assets (homes, cars, factories and money) and to some extent by the future earning-power of people who have borrowed from the bank. It is essential that the legal code recognize and clarify this position -- i.e. that bank-notes etc. are not receipts for bailed goods that are expected to be kept in custody. The legal code also needs to clarify terms and conditions around the contract -- not specify the terms, but clarify them. If we have such a system in place, fractional banking is a useful system because it monetizes assets that cannot otherwise be monetized.
  3. Confusion about fractional reserve banking

    If everyone becomes convinced that fractional reserve banks are a bad idea, then there will not be any such banks in a free economy. However, if people think it is a fine idea, they have the right and freedom to engage in it. No fraud is involved as long as the participants are clear about what they are agreeing to. I think it is a pretty good bet that fractional reserve banking will be one of the many choices that would thrive in a free-economy. Before the Fed was created, the U.S. had a few banks that kept a 100% reserve, and a few others that kept extremely high reserves. It also had banks that kept very low reserves. As long as both remain legal, and customers have a choice about what bank they wish to use, I'm fine with that. As long as fractional-banking is not banned by law, I', fine with the political side of it. As for the wisdom of fractional reserve banking: actually it is a great idea, though it needs some clarification in its contracts and its terms.
  4. Confusion about fractional reserve banking

    So, you're against a fractional reserve system where the system is unclear to the parties? You seem to say that no frugal minded person would deposit their money in a bank that they knew was running as a fractional reserve bank. Maybe you meant something else, because history shows that most people were happy to deposit their money in fractional reserve banks, with full knowledge of how the system worked.
  5. Confusion about fractional reserve banking

    Preponomics, The essence of your point seems to be this: the government should step in and prevent people from contracting with each other on terms they consider desirable (whether they are trading for promises, shells, of homeopathic medicines), because the government knows better than these private people.
  6. Greece

    Yes, that's one form of redistribution. In addition, the way it plays out is like this: say that overnight all Greek banks are only obliged to pay out Drachmas. Suddenly, the Greek government's guarantee of bank-deposits is a promise in which people can believe again. They will get their money -- in Drachma -- up to the amount insured by the Greek government, and even over that amount for any bank that the government decides to bail out. A person who owns shares in a bank that might otherwise have gone under, benefits relative to someone who bought shares in a stronger bank. If the government wipes out the shareholders as a condition of a bail-out, the bond-holders of the weaker bank may be the ones being helped, etc. All these are forms of re-distribution. Some people are better off without any change in the size in the pie, so someone, somewhere is paying.
  7. Greece

    Switching to the Drachma and then devaluing the currency does not affect foreign-trade alone. It lowers the value of money, thus lowering the real value of all contracts expressed in nominal terms.It lowers real wages across the economy and it lowers the real value of loans held by creditors. Economies that are in Greece's situation are caught in an unreality. People are being paid wages they ought not be paid, creditors have not written down their loan assets. The classical solution to this is -- in the words of Andrew Mellon -- "Liquidate labor, liquidate stocks,liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system." If this is politically impossible, then the economy needs some other means of purging rottenness . The modern way is to devalue the currency, effectively using wealth re-distribution to take value from the competent, to ease the hurt of the incompetent. It's immoral, but just hanging around in limbo does not help anybody either.
  8. Greece

    In very general terms, even under capitalism one's economic condition will change with the changing fortunes of suppliers and customers. Trade and division of labor are benefits; anything that disrupts these is a negative.Today, the serious contagion will come from debtor to creditor. If Greece collapses, what happens to the debt that Greece owes to foreigners? Greece has already defaulted on a part of its debt, and some of the rest has already been written down. The impact will be big, but not catastrophic. The larger fear is not only that Greece will impact Europe directly, but rather that if Greece leaves the Euro, other countries may follow. Greece has already defaulted on its debt. If it leaves the Euro, it will probably also default on the rest -- paying cents on the Euro. When this happens, what if Spain and Portugal figure that they'll do the same? Spain is big enough that it would cause a far more serious crisis. At some point, the trillions begin to add up! Thie main route of contagion is: money owed to foreigners (not just owed by the government, but also by citizens). When a debtor defaults, the creditor who was carrying that loan will take a loss if he has not already accounted for the lower payback. In Greek's context, given the political situation there, the two likely routes are either for them are to leave the Euro or to have other countries give them aid. They will use the threat of the first to try to get the second. It is unclear who will blink first. This type of negotiating game is almost impossible to predict. If I had to guess, the rest of Europe will blink as long as Greece makes some type of pretense that it will do some austerity. Then, at some stage in the future -- the rest of Europe will finally boot Greece out. Odds are the dollar will remain strong relative to other currencies as this drama plays out.
  9. Michigan's Financial Manager Law

    In Michigan, the pre-requisite to such a manager being appointed is that the local government (or school district) must be in financial trouble. If the local organization goes bankrupt, the bankruptcy judge has a lot of power in voiding union contracts and so on. This process allows the state government to appoint an administrator with similar powers. So, it is like an administrative version of bankruptcy that tries to preempt a judicial one. I guess the key question is: do citizens really have the right to appoint a government of crooks? I don't see why this should be so. I think a state law that says that holds local governments to certain basic standards of fiscal responsibility is fine. Politically, this cannot help the governor. The general attitude seems to a mix of people blaming him for disenfranchising black voters and breaking unions. Though I think he's trying to do the right thing by stepping in, a part of me says: let them go to the hell they voted for themselves. Folk who live in Detroit have had decades of notice that they're going downhill. Moving in will simply give the worst of their politicians someone else to blame.
  10. Local Currencies

    Have you tried Kitco.com?
  11. Stiffer penalties for legal US residents

    Ah, I missed the link around that single word. What the chief is doing is not favoring illegals if illegals are barred from getting licences in the first place. Of course, he is refusing to help enforce federal government immigration law on these people; but that's a separate issue.
  12. Stiffer penalties for legal US residents

    The Pajama Media article contains a link to an LA Times article. However, nothing ion that LA Times article says anything about special rules for legal residents vs. illegal ones. The one quote that the Pajama media blogger quotes is presented out of context, to suggest that it refers to illegal immigrant, whereas there is nothing in the LA Time article to suggest this.
  13. Spam Attacks on THE FORUM

    Do you think this might a concerted attack rather than just advertisers? We experienced an attack by a group of 5-10 guys a couple of years ago: folks who wanted to "have some fun" causing confusion on an Objectivist forum. I wonder if there's something similar going on here. Is there a pattern to the IPs? Are they from some particular country?
  14. Keynesian Spending is Cargo Cult Economics

    Exactly.There is a thin silver lining: appeals to pure altruism doesn't work well, and usually have to be supplemented by appealing to self-interest. Unfortunately, this is expressed via fear: if you do not help, the house of cards will collapse, and you will suffer too; help or the bad guys will pull you down. Then, the way "the bad guys" are defined is used as a device to seize the freedom of good guys. So, instead of blaming a mix of bad lenders and bad borrowers, the politicians frame it as Wall St. vs. Main St., which allows them to go after the good guys on Wall St.
  15. Keynesian Spending is Cargo Cult Economics

    True, and yet there is a sense in which Keynesianism "works" and this aspect gives Keynesians their ammunition. Let me explain: The classical approach to recession was "liquidation": recognize losses, fire a lot of people. Then, start from a new bottom and rise again. The Keynesian approach is to take from the many still left standing and give to the one's who have been badly hit. The classical approach is to allow the recession to be as deep as it has to be; the Keynesian approach is to stop it from going as deep as that, by resorting to redistribution. For instance, in the current recession, households have changed some financial behavior, cutting back on their debt and their recurring financial obligations. It may not appear that this has happened, but it has happened to some extent. In fact, though some of the changes have been small, they're also unprecedented (for instance total household indebtedness previously rose for decades, but has actually not just flattened out but has turned slightly downward). Still, if the government had left things alone, this pullback would have been much sharper, with people correcting much more rapidly. Instead, the government has stepped in, borrowing from future production, to "help" the economy now. The result is that the recession has been less deep than it ought to have been, and so people have corrected much less. As a consequence, the recession has been longer than it otherwise would have been. Not only does the government prolong the pain now, but the only way it does so is by making the long term that much less attractive. When Keynesians say "in the long term we're all dead" it actually encapsulates their psychology quite well. Mike Shedlock has a nice variation on this, saying "For Keynesians, the short term is forever": i.e. every year they find that they have to keep recommending a little more borrowing from future wealth "for the short run". Like chief Vitalstatistix, they keep evading, hoping that "tomorrow never comes".
  16. Keynesian Spending is Cargo Cult Economics

    Redistribution is the heart of Keynesianism. The classical approach to recession was "liquidation": recognize losses, fire a lot of people. Then, start from a new bottom and rise again. The Keynesian approach is to take from the many still left standing and give to the one's who have been badly hit. Politicians like Keynesianism because it tries to remove blockages in the system and address debtor stagnation by stealth redistribution rather than by widespread liquidation.
  17. Tax rates lower in poorer countries

    Exactly. These are the kinds of things I think of as "structural". Hernando de Soto's books focus on some of these issue.For instance, I think structural changes starting in the late 1990s were a key reason the U.S. economy took off, but the "supply-siders" were in vogue and gave excessive credit to lowering of tax-rates. If the government's share of the GDP is high, it does have an impact; if tax rates at the higher-income brackets are high (for a given government share of GDP), that too has an impact, but I think there is a tendency to over-credit the effects. The 1970's-style "1 for me, 19 for you" tax system can make extra profit seem futile, but within today's ranges, most businessmen will not stay at home and stop being productive if they have to pay more in taxes.
  18. Tax rates lower in poorer countries

    One useful way to look at government intervention in an economy is to break it down into: structural, fiscal and monetary. By structural, I mean the various (economy-related) laws that make people act in ways they would not in a free-economy:for instance laws that require a tedious licencing process for anyone wanting to start a business, laws making it difficult to bring new property (e.g. Brazil's slums) into the formal system of property-rights, laws that give unions an unfair advantage in negotiations with employers, laws that impose heavy "environmental"controls, and so on. A way to sum these up would be: how well the law recognizes property-rights and allows people to control the disposition of their property. By fiscal, I mean that sub-segment of laws that decides how much tax will be imposed and is best measured by things like "% of GDP under direct government control". By monetary, I mean the extent to which the government devalues its currency via inflating its supply. By far, structural issues are the most important factor that distinguishes wealthy economies from poorer ones. Of course, if tax rates and monetary policy are extremely bad they can override, but the most common situation is that structural issues hold back economic growth. If one looks at the "Asian tigers" of the 1990's and at China and India, the key thing these countries did was make it easier for their businessmen to set up businesses and run them in a way that was far more unfettered than the past.
  19. Deflation can only occur after inflation

    I prefer that usage too: i.e. the expansion of money, ... and, under a fiat-money system, its artificial creation. However, under this concept of inflation, wouldn't the best measure of inflation be something that directly measures the quantity of money?
  20. Deflation can only occur after inflation

    In what sense do you use the term "inflation" here: to mean a rise in prices or to mean an expansion of the money supply?The price of something as durable as gold also take into account the future expectations.
  21. Deflation can only occur after inflation

    Amber, The term "inflation" is used to mean two things: a rise in prices and a rise in the quantity of money. One can try to use it to always mean one or the other, but one still needs a term to use when talking to others (it is unfortunate that there is no other word to describe "price-rise"). Anyhow, that is about convincing others. Before that, one has to form one's own conceptualization. I think of it as follows: Prices tend to rise when there is an expansion of the money supply. This is an abstract form of the so-called "Quantity theory of money" (Aside: I think this is the level of abstraction that is valid, while trying to get more more detailed, with P x Q = M x V, is potentially misleading.) At that level of abstraction, the quantity theory of money is a restatement of the ordinary Theory of Demand: when there is more of something, its price declines. When there is more of money, it's "price" -- in terms of other goods and services -- declines... and the price of other goods and services (as expressed in money-- rises) There are two important additions to this: 1. Money itself has many close substitutes. So, the laws of substitution also apply. If the supply of a certain type of banana stays constant but the supply of another close substitute suddenly rises, it can make the price of the former fall, since some demand is satisfied by using the plentiful (and, now, cheaper) variety. Economists debate about whether money is best described as M1, or M2, or MZM, or M3. Actually, there is a whole continuum of substitutes. We might have to choose one or two of those if we're to compile a metric; but, that metric will only hold as long as the mix of substitution stays within a narrow range. The payoff of this point is this: we live in an economy where credit is a large part of transactions. Some transactions -- like home purchases (perhaps autos too)-- have more credit flowing from the buyer to the seller than they have "real" cash. Given the system we have in place, this credit is not necessarily someone else's cash being channeled to the seller. It can be manufactured money (i.e. expansion). In our money day economy, the largest expansion of money is driven by the expansion of credit, not the printing of bills. We've had a long-time expansion of bills. In addition, what we had in the recent past was a particular expansion of credit. 2. When money is expanded, the new money hits some particular person first. Someone gets the "free-gift". So, this person's ability to spend goes up while that of everyone else remains the same. So, the price-rise impact will be felt in areas where this person spends money. Of course, such expansion happens across thousands of people, so it's an easy assumption to think that such expansion happens somewhat evenly across the population. However, this is mostly not true. Credit expansions are often targeted. Sometimes it could be targeted at a geographical area, sometimes at an industry, etc. The less-targeted areas will then not see an impact for a while. The knock-on effect of such targeting is that impacts relative market values. Instead of everything rising in price, homes might rise in price much more than other assets. This, in turn, changes the valuation calculus and increases the relative demands between goods. In the case of homes, it made more people think of homes as an investment, which was false. This brought forth more relative demand for housing. It is very difficult to parse out the various motivations of buyers in the aggregate; so, these things have a temporary self-fulfilling effect while they look just like a real increase in demand. They are made worse by charlatans who pile on seeing that they can ride a bubble for a year or two. As time passes, it becomes apparent that the change in relative demand was a fiction. The change was in nominal (money/credit) terms, but not in real value. People really do not value housing so much more than everything else. Since the focus of monetary expansion has been an asset market, where valuations are based on future expectations (housing, stock-market, etc.) the change in expectations can cause a crash. [e.g. If I think gold will go to $2000 in 5 years, it is worth a certain amount to me; if I think it will go to $2000 in ten years, its current value to me crashes.] Since this asset has been financed by credit, the buyer's ability to repay comes into question. Thus starts the fear phase and the default phase. This is a phase where credit contracts as a whole lot of credit is simply written off, while banks are more wary of giving new credit, and people are more wary of taking on new credit. So, for a little while we've been in a phase of contraction of credit that has counter-balanced the Fed's creation of new money. In addition, in a phase like this, the demand for money rises (witness all the talk of money "sitting on the sidelines"). We're somewhere in that contraction phase now.
  22. Dr. Peikoff on The Mosque in Manhattan at Ground Zero

    I'm not sure what exact point you're making Ray, but look to the modern stereotype of a religious state: Iran. What one sees is a revolution that came by popular request, which means ... by ideology. The pure force element was the Shah, with his army and his secret police, but this force proved powerless when popular mood reached a tipping point. The real threat comes from the ideology of militant Islam that has become the loudest voice within Islam; it is a threat not because it wields power as such, but because it wields power as it convinces more people that it is the right ideology. If the U.S. moves toward being a religious state any time this century, it will not be because of some assault by force by the winning religion, it will be via ideology. Of the unlikely scenarios, the most likely would be a growing shift toward a conservative-looking, Judeo-Christian sympathetic, nationalist ideology that promises protection from the left's impotence on the economy and on protecting the security of the U.S. So, the worst foreseeable long-term consequence of Islamic-sponsored violence against the U.S. will be to push the country further into the hands of "conservatives".
  23. Dr. Peikoff on The Mosque in Manhattan at Ground Zero

    The hold that these religions have is primarily through ideology and only secondarily through force. Attila needs the witch-doctor, even if they're embodied in the same person.
  24. My Site

    Congrats! I love it.
  25. Tea Parties vs. Open Immigration. My contradiction and dilema.

    This is analogous to the question that is sometime asked on forums: what if some rich enemy bought up all the land around you and did not let you leave your house? As for public property, if using it is trespass, immigrants are not the only one's violating rights.