Panic of 1837

https://en.wikipedia.org/wiki/Panic_of_1837

Panic of 1837

MD: At MoneyDelusions, there’s a tool we use to test ideas. Ideas come up when someone thinks there’s a better way to do something. Thus, something is already being done. People resist change and they will put great energy into preserving the current process rather than trying a new process that promises improvements.

Well, what if the roles were reversed? What if the proposed process was in place and working? What if the existing process had to prevail as a “new” idea?

Let’s try it with this article. Let’s assume that the “real” money process was in effect. Would the subject of this essay, The Panic of 1837, even exist? Or if it did exist or arise, would it be as severe under the “real” money process described in the side bar? If the issues could arise, could the actual existing process deal with the issues better?

Let’s give it a try. The article we annotate here is from Wikipedia.

The Texas Handbook has many articles on this subject. We may try the tool to test ideas it presents.

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Whig cartoon showing the effects of unemployment on a family that has portraits of Democratic Presidents Andrew Jackson and Martin Van Buren on the wall.

The Panic of 1837 was a financial crisis in the United States that touched off a major depression, which lasted until the mid-1840s. Profits, prices, and wages went down, westward expansion was stalled, unemployment went up, and pessimism abounded.

MD: Notice the language “touched off”. We’re reading this article as if a “real” money process was in effect and efficiently operating. Could anything “touch off a major depression” with a “real ” money process in effect? Why would profits, prices, and wages go down? Why would westward expansion be stalled? Why would unemployment go up? Why would pessimism abound?

The panic had both domestic and foreign origins. Speculative lending practices in the West, a sharp decline in cotton prices, a collapsing land bubble, international specie flows, and restrictive lending policies in Britain were all factors.[1][2]

MD: Note, none of these claimed causes exist with a “real” money process. There are “no” lending “practices” when it comes to a “real” money process. When a trader sees clear to deliver on a promise that spans time and space, he “creates” money. He doesn’t “borrow” money. Someone doesn’t “lend” him money. There is no resistance to a responsible trader (one who delivers as promised) when he makes the promise. The problems “all” happen if he fails to deliver…and those problems have a very different characteristic if “borrowing” and “lending” are not involved. The key element here is “responsibility”.

The lack of a central bank to regulate fiscal matters, which President Andrew Jackson had ensured by not extending the charter of the Second Bank of the United States, was also key.

MD: Here comes the recommended improvement…”a central bank” to regulate fiscal matters. Well, we already have a process that “regulates fiscal matters” (i.e. those related to money). (1) If the trader creating the money is not responsible, he incurs and INTEREST load. Or more correctly, a “responsible” trader never incurs an INTEREST load. If there’s a problem delivering on a promise, that problem doesn’t get smaller by imposing an INTEREST load. The argument against a central bank is obvious. A central bank can only make matters worse. In fact, it can be used…and is easily shown to be used… to cause a panic. Further (2), Andrew Jackson had experience with such solutions and rejected the charter for the Second Bank. They’re saying here that the panic would not have happened if this “new centeral bank” idea was allowed. Let’s watch them make the case.

This ailing economy of early 1837 led investors to panic – a bank run ensued – giving the crisis its name.

MD: They claim an “ailing economy”. What caused it to be ailing? Who are these “investors” who are led to panic. With a “real” money process, investors only play a role when irresponsible traders are concerned. Supposedly, such traders are higher risk and thus must pay INTEREST premiums to cover that risk. It works like “casualty insurance” where PREMIUMS = CLAIMS. With responsible traders, CLAIMS are zero…so PREMIUMS are zero.

A real money process imposes INTEREST load in direct response to DEFAULTs on trading promises. Responsible traders don’t DEFAULT, thus they bear no INTEREST load. All responsible traders a alike as far as the process is concerned. Irresponsible traders come with varying degrees of “propensity to DEFAULT”. This is also true with casualty insurance where those with greater risk of CLAIM pay greater PREMIUMS. And as with insurance claimants, filing a CLAIM is a choice. If you can resolve the issue without filing a CLAIM you can maintain a lower PREMIUM load.

And how about the “bank run”? Well, no bank exists. It only exists with the solution they propose. But its obvious here, it is their very solution that introduces this additional possible cause. And what is a bank run? It’s a case of “irresponsible banks DEFAULTING”. Their process has a 10x leverage advantage. They can “lend” 10x as much money as they have. Well, that gives them 10x the motivation to “screw” their customers…i.e. those who trusted them to keep their money safe. See how easy it is to show how defective the existing solution can be? The tables are turned. “They” must prove their case…and it obviously can’t even be argued, let alone proved.

The run came to a head on May 10, 1837, when banks in New York City ran out of gold and silver. They suspended specie payments and would no longer redeem commercial paper in specie at full face value.[3]

MD: And here’s another claim that is easily refuted. Precious metals are “not” money. They are just stuff standing in as money. In a “real” money process, they play no role in trade. If you have surplus money and you think its safer to have gold, then buy (i.e. trade your money for) gold. That’s a choice.

Obviously the gold can be stolen as easily (or even more easily) than money. Remember, money may simply be an entry in a ledger. If that ledger is transparent for other traders to scrutinize (which the so-called financial audit does), then the money is difficult to steal.

This solution of “substituting specie for a promise” does nothing but give risk another avenue to come about. Worse, the value of the specie can change over time and space (e.g. a gold shipment can be robbed…or a new huge source can be found), and thus change in supply/demand determined value in trade. That can’t happen with money created in a “real” money process.

A significant economic collapse followed. Despite a brief recovery in 1838, the recession persisted for approximately seven years. Nearly half of all banks failed, businesses closed, prices declined, and there was mass unemployment.

MD: Look what happened! Half the ” banks” failed. With no banks to fail, there are no bank failures. You’re bank solution is openly flawed. Why? Because your solution presents a domino effect. One “borrower” DEFAULTs. If you’ve “loaned” out all your money, you can’t pay “demand” deposits. But with the “real” money process no such existing commitments are affected.

If a trader DEFAULTs on his promise, new “non-responsible” traders wishing to create money incur INTEREST load to immediately mitigate that DEFAULT. This is an automatic negative feedback mechanism. If the DEFAULT was the result of market softening (i.e. the demand prompting the promise was not as anticipated), then new traders are discouraged from making such promises too. Thus you don’t have “bubbles”. They get nipped in the bud. Further, if the demand is real, more traders move in to meet it and supply/demand imbalance is quickly corrected…thus prices remain competitive.

From 1837 to 1844 deflation in wages and prices was widespread.[4] The lack of deposit insurance deepened the Panic. By 1850 the economy was booming again, a result of increased specie flows from the California Gold Rush.

MD: INFLATION means there is a supply/demand imbalance. This is normal for any trade…except in a “real” money process, it is not normal for money. With money in perpetual free supply, INFLATION of money is perpetually zero. This is additionally achieved by mitigating DEFAULTs immediately with INTEREST collections of like amount.

And look how they say they came out of the panic! They found more gold! With a “real” money process, finding more gold just makes gold less dear…and thus trades of less other stuff…including “real” money created by traders.

So now I suggest you go through the rest of the article. (1) Make the case that the “cause” doesn’t even exist with a “real” money process involved. and (2) Make the case that the “banking” solution just exacerbates the problems…and in fact it is to the bankers benefit to instigate such disruptions. It is their way of manipulating the market. They call it the “business cycle”

Contents

Causes

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The crisis followed a period of economic expansion from mid-1834 to mid-1836. The prices of land, cotton, and slaves rose sharply in those years. The boom’s origin had many sources, both domestic and international. Because of the peculiar factors of international trade, abundant amounts of silver were coming into the United States from Mexico and China.[citation needed] Land sales and tariffs on imports were also generating substantial federal revenues. Through lucrative cotton exports and the marketing of state-backed bonds in British money markets, the United States acquired significant capital investment from Britain. The bonds financed transportation projects in the United States. British loans, made available through Anglo-American banking houses like Baring Brothers, fueled much of America’s westward expansion, infrastructure improvements, industrial expansion, and economic development during the antebellum era.[5]

From 1834 to 1835, Europe experienced extreme prosperity, which resulted in confidence and an increased propensity for risky foreign investments. In 1836, directors of the Bank of England noticed that its monetary reserves had declined precipitously in recent years due to an increase in capital speculation and investment in American transportation. Conversely, improved transportation systems increased the supply of cotton, which lowered the market price. Cotton prices were security for loans, and America’s cotton kings defaulted. In 1836 and 1837 American wheat crops also suffered from Hessian fly and winter kill which caused the price of wheat in America to increase greatly, which caused American labor to starve.[6]

The hunger in America was not felt by England, whose wheat crops improved every year from 1831 to 1836, and European imports of American wheat had dropped to “almost nothing” by 1836.[7] The directors of the Bank of England, wanting to increase monetary reserves and to cushion American defaults, indicated that they would gradually raise interest rates from 3 to 5 percent. The conventional financial theory held that banks should raise interest rates and curb lending when they were faced with low monetary reserves. Raising interest rates, according to the laws of supply and demand, was supposed to attract specie since money generally flows where it will generate the greatest return if equal risk among possible investments is assumed. In the open economy of the 1830s, which was characterized by free trade and relatively weak trade barriers, the monetary policies of the hegemonic power (in this case Britain) were transmitted to the rest of the interconnected global economic system, including the United States. The result was that as the Bank of England raised interest rates, major banks in the United States were forced to do the same.[8]

An 1837 caricature blames Andrew Jackson for hard times.

When New York banks raised interest rates and scaled back on lending, the effects were damaging. Since the price of a bond bears an inverse relationship to the yield (or interest rate), the increase in prevailing interest rates would have forced down the price of American securities. Importantly, demand for cotton plummeted. The price of cotton fell by 25% in February and March 1837.[9] The American economy, especially in the southern states, was heavily dependent on stable cotton prices. Receipts from cotton sales provided funding for some schools, balanced the nation’s trade deficit, fortified the US dollar, and procured foreign exchange earnings in British pounds, then the world’s reserve currency. Since the United States was still a predominantly agricultural economy centered on the export of staple crops and an incipient manufacturing sector,[10] a collapse in cotton prices had massive reverberations.

In the United States, there were several contributing factors. In July 1832, President Andrew Jackson vetoed the bill to recharter the Second Bank of the United States, the nation’s central bank and fiscal agent. As the bank wound up its operations in the next four years, state-chartered banks in the West and the South relaxed their lending standards by maintaining unsafe reserve ratios.[2] Two domestic policies exacerbated an already volatile situation. The Specie Circular of 1836 mandated that western lands could be purchased only with gold and silver coin. The circular was an executive order issued by Jackson and favored by Senator Thomas Hart Benton of Missouri and other hard-money advocates. Its intent was to curb speculation in public lands, but the circular set off a real estate and commodity price crash since most buyers were unable to come up with sufficient hard money or “specie” (gold or silver coins) to pay for the land. Secondly, the Deposit and Distribution Act of 1836 placed federal revenues in various local banks, derisively termed “pet banks”, across the country. Many of the banks were located in the West. The effect of both policies was to transfer specie away from the nation’s main commercial centers on the East Coast. With lower monetary reserves in their vaults, major banks and financial institutions on the East Coast had to scale back their loans, which was a major cause of the panic, besides the real estate crash.[11]

Americans attributed the cause of the panic principally to domestic political conflicts. Democrats typically blamed the bankers, and Whigs blamed Jackson for refusing to renew the charter of the Bank of the United States and on the withdrawal of government funds from the bank.[12] Martin Van Buren, who became president in March 1837, was largely blamed for the panic even though his inauguration had preceded the panic by only five weeks. Van Buren’s refusal to use government intervention to address the crisis, such as emergency relief and increasing spending on public infrastructure projects to reduce unemployment, was accused by his opponents of contributing further to the hardship and the duration of the depression that followed the panic. Jacksonian Democrats, on the other hand, blamed the Bank of the United States for both funding rampant speculation and introducing inflationary paper money. Some modern economists view Van Buren’s deregulatory economic policy as successful in the long term, and argue that it played an important role in revitalizing banks after the panic.[13]

Effects and aftermath

The modern balaam and his ass, an 1837 caricature placing the blame for the Panic of 1837 and the perilous state of the banking system on outgoing President Andrew Jackson, shown riding a donkey, while President Martin Van Buren comments approvingly.

Virtually the whole nation felt the effects of the panic. Connecticut, New Jersey, and Delaware reported the greatest stress in their mercantile districts. In 1837, Vermont’s business and credit systems took a hard blow. Vermont had a period of alleviation in 1838 but was hit hard again in 1839–1840. New Hampshire did not feel the effects of the panic as much as its neighbors did. It had no permanent debt in 1838 and had little economic stress the following years. New Hampshire’s greatest hardship was the circulation of fractional coins in the state.[citation needed]

Conditions in the South were much worse than in the East, and the Cotton Belt was dealt the worst blow. In Virginia, North Carolina, and South Carolina the panic caused an increase in the interest of diversifying crops. New Orleans felt a general depression in business, and its money market stayed in bad condition throughout 1843. Several planters in Mississippi had spent much of their money in advance, which led to the complete bankruptcy of many planters. By 1839, many plantations were thrown out of cultivation. Florida and Georgia did not feel the effects as early as Louisiana, Alabama, or Mississippi. In 1837, Georgia had sufficient coin to carry on everyday purchases. Until 1839, Floridians were able to boast about the punctuality of their payments. Georgia and Florida began to feel the negative effects of the panic in the 1840s.[citation needed]

At first, the West did not feel as much pressure as the East or the South. Ohio, Indiana, and Illinois were agricultural states, and the good crops of 1837 were a relief to the farmers. In 1839, agricultural prices fell, and the pressure reached the agriculturalists.[14]

Within two months the losses from bank failures in New York alone aggregated nearly $100 million. Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of state banks received a shock from which it never fully recovered.[15] The publishing industry was particularly hurt by the ensuing depression.[16]

Many individual states defaulted on their bonds, which angered British creditors.[17]: 50–52  The United States briefly withdrew from international money markets. Only in the late 1840s did Americans re-enter those markets.[citation needed] The defaults, along with other consequences of the recession, carried major implications for the relationship between the state and economic development. In some ways, the panic undermined confidence in public support for internal improvements.[17]: 55–57  Although state investment in internal improvements remained common in the South until the Civil War, northerners increasingly looked to private rather than public investment to finance growth.[citation needed] The panic unleashed a wave of riots and other forms of domestic unrest. The ultimate result was an increase in the state’s police powers, including more professional police forces.[18][17]: 137–138 

Recovery

Hard times token, late 1830s; privately minted, used in place of the one-cent coin during currency shortage; inscription reads “I Take the Responsibility”, showing Andrew Jackson holding a drawn sword and a coin bag emerging from a strongbox.

Most economists agree that there was a brief recovery from 1838 to 1839, which ended when the Bank of England and Dutch creditors raised interest rates.[19] The economic historian Peter Temin has argued that when corrected for deflation, the economy grew after 1838.[20] According to the Austrian economist Murray Rothbard, between 1839 and 1843, real consumption increased by 21 percent and real gross national product increased by 16 percent, but real investment fell by 23 percent and the money supply shrank by 34 percent.[21]

In 1842, the American economy was able to rebound somewhat and overcome the five-year depression, but according to most accounts, the economy did not recover until 1844.[22] The recovery from the depression intensified after the California gold rush started in 1848, greatly increasing the money supply. By 1850, the US economy was booming again.

Intangible factors like confidence and psychology played powerful roles and helped to explain the magnitude and the depth of the panic. Central banks then had only limited abilities to control prices and employment, making bank runs common. When a few banks collapsed, alarm quickly spread throughout the community and were heightened by partisan newspapers. Anxious investors rushed to other banks and demanded to have their deposits withdrawn. When faced with such pressure, even healthy banks had to make further curtailments by calling in loans and demanding payment from their borrowers. That fed the hysteria even further, which led to a downward spiral or snowball effect. In other words, anxiety, fear, and a pervasive lack of confidence initiated devastating, self-sustaining feedback loops. Many economists today understand that phenomenon as an information asymmetry. Essentially, bank depositors reacted to imperfect information since they did not know if their deposits were safe and so fearing further risk, they withdrew their deposits, even if it caused more damage. The same concept of downward spiral was true for many southern planters, who speculated in land, cotton, and slaves. Many planters took out loans from banks under the assumption that cotton prices would continue to rise. When cotton prices dropped, however, planters could not pay back their loans, which jeopardized the solvency of many banks. These factors were particularly crucial given the lack of deposit insurance in banks. When bank customers are not assured that their deposits are safe, they are more likely to make rash decisions that can imperil the rest of the economy. Economists have concluded that the suspension of convertibility, deposit insurance, and sufficient capital requirements in banks can limit the possibility of bank runs.[23][24][25]

See also

References

Timberlake, Richard H. Jr (1997). “Panic of 1837”. In Glasner, David; Cooley, Thomas F. (eds.). Business cycles and depressions: an encyclopedia. New York: Garland Publishing. pp. 514–16. ISBN978-0-8240-0944-1. Knodell, Jane (September 2006). “Rethinking the Jacksonian Economy: The Impact of the 1832 Bank Veto on Commercial Banking”. The Journal of Economic History. 66 (3): 541. doi:10.1017/S0022050706000258. S2CID155084029. Damiano, Sara T. (2016). “The Many Panics of 1837: People, Politics, and the Creation of a Transatlantic Financial Crisis by Jessica M. Lepler”. Journal of the Early Republic. 36 (2): 420–422. doi:10.1353/jer.2016.0024. S2CID148315095. “Measuring Worth – measures of worth, prices, inflation, purchasing power, etc”. Retrieved 27 December 2012. Jenks, Leland Hamilton (1927). The Migration of British Capital to 1875. Alfred A. Knopf. pp. 66–67. Davis, Joseph H. (2004). “Harvests and Business Cycles in Nineteenth-Century America” (PDF). Quarterly Journal of Economics. Vanguard Group. 124 (4): 14. doi:10.1162/qjec.2009.124.4.1675. S2CID154544197. Alison, Archibald. History of Europe: From the Fall of Napoleon, in MDCCCXV to the…, Volume 3. New York: Harper and Brothers. p. 265. Temin, Peter (1969). The Jacksonian Economy. New York: W.W. Norton & Company. pp. 122–147. Jenks, Leland Hamilton (1927). The Migration of British Capital to 1875. Alfred A. Knopf. pp. 87–93. North, Douglass C. (1961). The Economic Growth of the United States 1790–1860. Prentice Hall. pp. 1–4. Rousseau, Peter L (2002). “Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837” (PDF). Journal of Economic History. 62 (2): 457–488. doi:10.1017/S0022050702000566. hdl:1803/15623. Bill White (2014). America’s Fiscal Constitution: Its Triumph and Collapse. PublicAffairs. p. 80. ISBN9781610393430. Hummel, Jeffery (1999). “Martin Van Buren The Greatest American President” (PDF). The Independent Review. 4 (2): 13–14. Retrieved 2017-08-01. McGrane, Reginald (1965). The Panic of 1837: Some Financial Problems of the Jacksonian Era. New York: Russell & Russell. pp. 106–126. Hubert H. Bancroft, ed. (1902). The financial panic of 1837. The Great Republic By the Master Historians. Vol. 3. Thompson, Lawrance. Young Longfellow (1807–1843). New York: The Macmillan Company, 1938: 325. Roberts, Alasdair (2012). America’s First Great Depression: Economic Crisis and Political Disorder after the Panic of 1837. Ithaca, New York: Cornell University Press. ISBN9780801450334. Larson, John (2001). Internal Improvement: National Public Works and the Promise of Popular Government in the Early United States. Chapel Hill: University of North Carolina Press. pp. 195–264.[page range too broad]Friedman, Milton. A Program for Monetary Stability. p. 10. Temin, Peter. The Jacksonian Economy. p. 155. Rothbard, Murray (18 August 2014). A History of money and Banking in the United States: The Colonial Era to world War II (PDF). p. 102. Cheathem, Mark R.; Corps, Terry (2017). Historical Dictionary of the Jacksonian Era and Manifest Destiny. Lanham, Md.: Rowman & Littlefield. pp. 282–283. ISBN9781442273191; Roberts, Alasdair (2013). America’s First Great Depression: Economic Crisis and Political Disorder After the Panic of 1837. Ithaca, N.Y.: Cornell University Press. pp. 204–205. ISBN9780801478864. Chen, Yehning; Hasan, Iftekhar (2008). “Why Do Bank Runs Look Like Panic? A New Explanation” (PDF). Journal of Money, Credit and Banking. 40 (2–3): 537–538. doi:10.1111/j.1538-4616.2008.00126.x. Diamond, Douglas W.; Dybvig, Philip H. (1983). “Bank Runs, Deposit Insurance, and Liquidity”. Journal of Political Economy. 91 (3): 401–419. CiteSeerX10.1.1.434.6020. doi:10.1086/261155. JSTOR1837095. S2CID14214187.

  1. Goldstein, Itay; Pauzner, Ady (2005). “Demand-Deposit Contracts and the Probability of Bank Runs”. Journal of Finance. 60 (3): 1293–1327. CiteSeerX 10.1.1.500.6471. doi:10.1111/j.1540-6261.2005.00762.x.

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Goldmoney: Shakespeare on Finance

MD: I am a Goldmoney sucker. Rather than go to the pawn shops and gold shops to get my gold, I went to Goldmoney. That was back in the day when I was sure the “train was finally leaving the station”.  Gold against the dollar was going up very quickly … as was silver.

To test the wisdom of what I had done, I tried to get physical gold from them. The process was slow and expensive. My turn-around costs exceeded 10% … and that’s not including the import duty I had to pay. So all but one ounce still rests with them. I really don’t ever expect to see it again. When we have a reset, there will be all kinds of reasons why I can’t get to that gold.

As it turns out, I was even stupider than I thought. Gold went down against the dollar … and is still down. Go figure.  So let’s see what wisdom Turk, the gold salesman, is putting out now. Here at MD we “know” gold is not money.

And look at the title: Here at MD we know there is no such thing as finance when you have access to a “proper” MOE process. This is because inflation is guaranteed to be perpetually zero … the time value of money is zero and it is in perpetual free supply to responsible traders. When (1+i)^n is perpetually 1.000, there is nothing for finance to do. They’re all out of work.

Shakespeare on Finance

We are told by Shakespeare: “Neither a borrower nor a lender be.” Is it good advice?

Like so many things in life, the answer is – it depends.

Individuals are different, and what is right for one person may not be suitable for another. What’s more, everyone’s circumstances are different, which may require different decisions that result in a myriad of outcomes.

Consider too what has happened to money in the four centuries that have passed since Shakespeare penned those immortal words. The Bard himself lived during a time of sound money, with commerce conducted using gold and silver coins.

MD: The obligatory “sound money” nonsense. We at MD can blow those arguments out of the water very simply by blasting their claimed attributes of money … one after the other.

But sound money ended in Britain and pretty much the rest of the world with the outbreak of war in 1914, though the last remnants survived until 1971.

MD: Gold as money never ever existed. If it ever got close, it was just as an expensive, inefficient, risky, trade restricting stand-in for money … that was always in the wrong place and in the wrong hands.

We now live in a world of fiat currency, where money-substitutes called dollars, pounds, euros and yen circulate rather than money itself. So what would Shakespeare be saying today?

MD: Boy does he need a good dose of reality. Fiat money “is” real money. The instances he enumerates are just from improper MOE processes. This is very familiar territory here at MD.

It’s an interesting question. Unfortunately The Bard is not around to answer it. But here’s how I see it.

MD: Actually, we should probably be looking for Francis Bacon. It’s not likely Shakespeare wrote a single line attributed to him. And I’m sure any of us who could have know him contemporaneously would find that obvious.

Let’s look at lending first. The interest rate one can earn on a savings account or other bank deposit is near zero. Even though the Bank of England and other central banks are talking about raising rates – and the Federal Reserve recently bumped up interest rates slightly – central bank policy across the globe is aimed at keeping interest rates low.

MD: Here at MD we recognize the term “lending” for what it is … a corruption of the traders invention and creation of money … by the money changers who co-opted the process. And the “proper” value of interest is zero … as is the proper value of inflation. Interest rates aren’t arbitrary. Interest is the immediate mitigation of defaults on money creating trading promises. These articles are always such painful reading. We here at MD see them for what they are: erudition founded on false premises. I’ll scan ahead now to see if there is anything in here even tangentially worth reading … and not purposeful self serving disinformation.

More importantly, interest rates on bank deposits are generally lower than the rising cost of living. What this means is that money put on deposit in a bank loses more purchasing power from inflation than it gains from the interest income earned on the deposit. It is in effect a tax on your wealth – your purchasing power. So Shakespeare’s advice could apply to making bank deposits, but borrowing is a trickier proposition.

Borrowing is always a two-edged sword. There are always risks when borrowing money, but there can be benefits too.

For example, it often makes sense to obtain a mortgage to purchase a house, given that having a shelter is a basic human need. But even here there is a risk. If mortgage payments are not paid on schedule, one risks losing their house, and perhaps even the equity they have built up in it.

MD: Only under an “improper” MOE process. In a “proper” MOE process, the only risk anyone takes is making a bad trade. All the risks you see enumerated here are money changer imposed risks … and they’re not risks … they’re purposeful predatory traps.

Borrowing for whatever purpose requires a lot of thought, but so does lending because it has risks too. These realities lead to an important question that tests Shakespeare’s admonition. Should one borrow or lend in today’s fiat currency world?

MD: What a stupid false choice! The real choice is: Should a trader trade over time and space today … or just in the here and now. The question only comes into play when you trade in the face of money changer predation and the manipulation by the governments they institute. They call it the “business cycle”. It is more properly their “farming operation.”

To help answer this question, I’ve created Lend & Borrow Trust Company Limited (“LBT”), and am pleased to say that Goldmoney is one of its investors. In fact, it is Goldmoney’s customers who I believe will understand the potential that LBT offers, as I explain in the following FAQs.

MD: Right out of the money changers playbook. I wonder what he would create if he had a clue what money really is. Frankly, having the where-with-all to create Goldmoney, he does have the where-with-all to institute a proper MOE process. But the problem is, there is no money to be made doing that. Unlike a Mutual Insurance Fund where money is made on investment income and otherwise premiums equal claims, with a “proper” MOE process, defaults equal interest collections … but there is no investment income … there is nothing to invest.

And this LBT is a little too close to LGBT for my comfort, thank you very much!

What is LBT?

LBT is an online peer-to-peer platform where lenders and borrowers interact to lend and borrow British pounds, Canadian dollars, euros, US dollars and Swiss francs. LBT is unique because it is the first P2P platform where all loans are secured by the borrower’s investment-grade gold and silver.

MD: I wonder if I could use this to get rid of my Goldmoney with no transaction cost.

What does LBT offer to lenders?

LBT provides an alternative to bank deposits. It enables lenders to earn interest income outside the banking system with five major national currencies. Through LBT’s online auctions, lenders:

  • may earn interest income at a rate above the inflation rate, and
  • are secured by the borrower’s gold/silver, which is sold to repay the lender if the borrower defaults.

MD: See how they must sustain the money changers “improper” MOE process to make a living. Do we really think people like Turk are our salvation? Do we really think the Harlem Globe Trotters and the Washington Generals are competing? … that they don’t report to the same management?

What does LBT offer to borrowers?

LBT enables borrowers to monetise their precious metals. Through LBT’s online auctions, borrowers:

    • may borrow at interest rates lower than available from banks,
    • use their investment-grade gold and silver bars as collateral to borrow, and
    • borrow in any of five currencies: GBP, USD, CAD, EUR and CHF.

MD: But can I do it without this fiction of borrowing. Can I just sell my “records of gold” for dollars and use it to pay off the money changers … who are overtly fleecing me right now at 8.25%?

How much can I lend?

There is no maximum, and the minimum is £5,000 or currency equivalent.

How much can I borrow?

You can borrow up to 65% of the value of your gold and silver that you pledge as collateral at loan commencement. LBT actively monitors this loan-to-value and makes a margin call if it rises to 75%, requiring the borrower to pledge more collateral and/or partially repay the loan to reduce it back to 65%. If the margin call is not met, LBT sells enough metal to meet the 65% benchmark.

Is LBT regulated?

Yes, LBT is based in the England and regulated by the Financial Conduct Authority to operate an electronic system in relation to lending. LBT does this through online auctions in which its customers participate.

MD: This is starting to look real humorous … like other religions. You’ve gotta love words like “authority” and “financial conduct”.

How are auctions started?

Online auctions are started by either the borrower or lender. Through these auctions lenders and borrowers compete with each other to seek an interest rate at which they are prepared to lend or borrow.

Can I borrow using my gold and silver in Goldmoney?

Yes, you choose how much and which metal or both you would like to pledge as collateral. At this time, only gold and silver stored in England and Hong Kong can be used.

How do I get started?

Click here to visit the LBT website and open an account.

Is there risk to lending or borrowing?

Yes, there is risk with everything in finance. Therefore, each individual needs to weigh the benefits LBT offers relative to the risks of lending and borrowing. If you are uncomfortable in making financial decisions, we recommend that you seek advice from a professional advisor. View LBT’s Risk Disclosure.

Did Shakespeare have any other financial advice?

There are many, and here’s my selection. “Money is a good soldier,” meaning it should be working for you because “Gold that’s put to use more gold begets”, provided of course it is done wisely.

MD: The trouble is “gold is not money” Turk! Would you refer to a “promise” as a soldier? Of course not! So why would you be comfortable referring to “money” as a soldier. Promises don’t “work for you”. You “work to deliver on them”. Big difference to the responsible trader. Not so much to the deadbeat.

 


This financial promotion has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by Lend & Borrow Trust Company Limited, which is authorised and regulated by the Financial Conduct Authority (“FCA”).


The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

MD: Anyone ever seen an instance of someone claiming “gold is money” and not finding them to be a gold salesman … or someone who has been deluded by a gold salesman?

Gold Money: Follow the money.

 

https://www.goldmoney.com/research/goldmoney-insights/follow-the-money?utm_source=Goldmoney+Insights&utm_campaign=ca347fc6a5-Goldmoney_E_News_06_10_2016&utm_medium=email&utm_term=0_3ade49cca2-ca347fc6a5-320598633

Follow the money

Since 2009, equities and other financial assets have climbed a wall of worry. Initially, it was recovery from the threat of a complete financial collapse, before the Fed saved the system once again.

Systemic collapse continued to be on the cards, with European banks at risk of bankruptcy. We still talk about this today. More walls of worry to climb.

The global economy has not imploded, as the bears have consistently warned. Systemic and other dangers still exist. The bears now point to excessive valuations as the reason for staying out of the market. But this misses the point: the general level of asset valuations depends not on fundamentals, but on credit flows.

MD: Credit flows are irrelevant with a proper MOE process. Any trader can create money anytime he can see clear to delivering on a trading promise over time and space. There is no such thing as credit with a “proper” MOE process.

It matters not whether there is cash sitting on the side-lines, or whether speculators borrow to invest, so long as the credit keeps flowing into financial assets. Just follow the money.

It is all about credit, and when you have central banks suppressing interest rates and causing bank credit to expand, they create a credit cycle. Modern credit cycles have existed since Victorian times, the consequence of fractional reserve banking.

MD: It’s not a consequence of “fractional reserve banking”. That just gives a small collection of elite a huge advantage over other traders. They get 10x inflation as a return. But with a proper MOE process, inflation is perpetually zero. Those elite thus have no advantage at all.

The cycle varies in length and the specifics, but its basic components are always the same: recovery, expansion, crisis and destruction. Today, central banks reckon their mission is to stop the destruction of credit, and to keep it continually expanding to stimulate the economy.

MD: It’s a farming operation of the money changers … always has been, always will be. It can only be stopped by instituting a competitive “proper” MOE process.

The economic and financial community fails to understand that the sequence of booms and slumps is not a free market disorder, but the consequence of a credit cycle distorting how ordinary people go about their business. It is a waste of time trying to understand what is happening in the economy without analysing credit flows.

MD: And it’s a waste of time analyzing credit flows under a “proper” MOE process where money is in perpetual free supply, which is in perpetual perfect balance with demand for money.

It is Hamlet without the Prince. This article walks the reader through the phases of the credit cycle, identifying the key credit flow characteristics, whose starting point we will take to be the end of the great financial crisis. It will conclude with a summary of what this tells us about current credit flows, and prospects for the near future.


The seeds of recovery

In a modern credit-driven economy, central banks see their role as preventing recessions, slumps, and depressions.

MD: Then we’re ready for a more modern trader-driven economy … that has no need for central banks.

The need to preserve the banking system, to stop one bank taking out the others in a domino effect, is paramount.

MD: It doesn’t happen … it can’t happen … with a proper MOE process. No trade is ever dependent on money supply.

To prevent the weakest banks collapsing takes financial support from the central bank by increasing the quantity of base money, while at the same time discouraging banks from calling in loans, particularly from their larger customers.

MD: Traders are the only creators of money. And that true even with our improper MOE process. Banks only restrict and manipulate traders and prey on them with their demands for tribute. There is no excuse of a bank being weak now with their 10x leverage (a 4% spread translates into a 40% return … doubling money in less than two years). There is no excuse for a bank at all with a proper MOE process.

Central bank priorities will have switched from fear of price inflation ahead of the crisis to fear of deflation. They are still informed by Irving Fisher’s description of how an economic crisis develops from financial flows. When businesses start to fail, banks call in their loans, causing otherwise sound businesses to collapse. The banks liquidate collateral into the market, undermining asset prices in a self-feeding downward spiral. The way to prevent it is to backstop the banks by issuing more money.

MD: And none of that happens … nor can it happen … with a proper MOE process.

We saw this at its most spectacular in the great financial crisis. The Fed effectively wrote open cheques to any bank that needed money, and for some that didn’t.

MD: And that causes no problem whatever. The banks failing to pay the money back … i.e. return and destroy it … is what causes the problem.

The most important rescue was of Fannie Mae and Freddie Mac, the two private-public entities that dominated the residential property market, with some $5 trillion of agency securities outstanding. The Fed’s initial involvement was to buy up to $500bn of agency debt through quantitative easing, supporting the remaining mortgage debt values and injecting a matching quantity of money into the banks in the form of excess reserves.

MD: This is an example of problems with an unresponsive (or non-existent) negative feedback control loop to achieve stability. With a proper MOE process, at the first instance of defaults, interest collections would increase. With increased interest load, the “flipping” in the housing sector quits working … and thus quickly quits happening.

This didn’t stop with Fannie and Freddie. AIG, Bear Sterns and Lehman were just a few of the names associated with the crisis. Term Auction Facility, Primary Dealer Credit Facility, Asset-backed Commercial Paper, Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, and Term Asset-Backed Securities Loan Facility entered the financial language as new rescue vehicles financed with raw money from the Fed.

MD: The more complicated you let it get … the worse it’s going to get. There is nothing simpler than a proper MOE process. And none of this complicated can nor need exist when such a process is instituted.

It wasn’t just the US. Most major jurisdictions were locked into the same credit cycle, and by 2007-08 they were all on the edge of the crisis. Consequently, the financial crisis in America was replicated in the UK and the Eurozone. Including Japan, the sum of the balance sheets of their four central banks increased from about $6.5 trillion to nearly $19.5 trillion today.

MD: They all use the same improper MOE process. And at the center of it is the family that owns all but two of the world’s central banks … the Rothschilds. Institute a proper MOE process in competition with the Rothschilds and they’ve got a really really big problems.

The increase in the liability side of central bank balance sheets has been substantially in the reserves of commercial banks. This is the most pronounced feature of the current credit cycle, potentially fuelling substantial levels of bank lending when the banks eventually become more confident in their lending to the non-financial sector.

MD: But those reserves are “loaned” out to traders? In other words, traders have been “allowed” to make promises spanning time and space. As long as they deliver on those promises there is no problem.

The recovery phase has now been in place for an extended period, lasting eight years so far. It has been characterised, as it always is, by an increase of financial asset prices. This is partly driven by the suppression of interest rates, which creates a bull market for bond prices, and partly by banks buying government bonds.

MD: With a proper MOE process, there is no such thing as interest rates. Rather cumulative interest collections perpetually equal cumulative defaults experienced. With a proper MOE process, governments would be unable to sell their bonds at any prices. This is because governments are provably total deadbeats and should pay 100% interest because they have 100% defaults.

Government bonds are always accumulated by the banks in large quantities during the recovery phase of the credit cycle.

MD: And what are they buying those bonds with? They’re doing it with the 10x leverage they have. With a proper MOE process, every trader has infinite leverage. That makes their 10x advantage pretty inconsequential.

I’ve gone more than far enough with this article. You get the gist of how to read this nonsense in light of the delusion the writers have. It’s always a good exercise to practice exposing their delusions.

Read on if your stomach can handle it. I have more important things to do..

The shortfall in fiscal revenue and the increased cost-burden on government finances leads to a general demand for credit to be switched from private sectors to governments. For the banks, investing in government debt is a safe harbour at a time of heightened lending risk, further encouraged by Basel regulatory risk weightings. On the back of falling bond yields, other financial assets rise in value, and therefore banks increasingly make credit available for purely financial activities.

In the current credit cycle, the boom in financial assets has been exaggerated by central banks buying government bonds as well. The result is a bond bubble far greater than would otherwise be the case. Consequently, when an economy moves from recovery into expansion, the price effect of the credit flows as they wash out of bonds into lending is likely to be more dramatic than we have ever seen before.

We appear to be on the cusp of this change into a phase of economic expansion for much of the world, though the situation in America is less clear. To understand the implications of this change, we must first examine the underlying credit flows.


Expansion – credit hidden then in plain sight

The stability that returns in the recovery phase, coupled with fading memories of the previous crisis, engenders growing confidence in the non-financial economy, which demands credit in increasing quantities for expansion of production. While interest rates remain suppressed, financial calculations, such as return on capital, make investment in even unwanted production appear profitable. It is the bankers which impede this early demand for money, because they still retain memories of the previous crisis and are determined not to repeat the errors of the past. Furthermore, bank regulators are still closing stable doors long after the horses have bolted.

Banks will have continued lending to big business throughout the recovery phase. Under pressure from large corporates, this lending also extends to their consumers, currently evident with car, or auto loans, financing most of the products of major motor manufacturers. Without this consumer credit, vehicles cannot be sold, and manufacturers would be forced to close factories. That is not where the problem under discussion lies: it is in the other 80% of the economy, the small and medium-size enterprises (SMEs), which the banks see as too risky. However, gradually at first, the banks begin to reassess the risk of lending to non-financial entities relative to owning the government bonds on their balance sheets.

Eventually, a new lending instinct in the banks gains momentum. The central issue is how to fund the early expansion of lending. It is not, as commonly supposed, by drawing down reserves from the central bank and putting them into public circulation. Other things being equal, the banks will retain those reserves as the basis for reorganising their balance sheets. Instead, they redirect their financial resources by reducing the level of government bonds held as assets on their balance sheets, substituting them for more profitable loans.

To the outside observer, there is little change in the rate of increase in the broad money supply, while bond prices fall as the banks sell them in increasing quantities.

Markets have an uncanny knack of discounting the bank selling of bonds from the earliest stages. Interest rates in America have already begun to rise, making short-term bonds, which represent most of the banks’ investments, unattractive. Yields start rising along the yield curve, and the banks who are slow to act find that they have escalating portfolio losses. Inevitably, equity markets turn tail as well, undermined by higher bond yields. Note how talk of valuations misses the point: the point is bank credit is being redirected from financial assets to satisfy traditional loan demand.

Eventually, the loan demands from non-financial SMEs become too persistent and profitable for the banks to ignore, without expanding their balance sheets.

During the expansionary cycle phase, when bond yields are rising and equities falling, business prospects for the non-financials appear much improved. As confidence builds and risk appears to diminish, banks compete to lend. Their base cost, the central bank rate paid on their reserves, is not material. Through the magic of expanding bank credit out of thin air, commercial banks, taken as a whole, can even charge interest at a lower rate than the FFR on loans deemed to be free of risk. In effect, commercial banks decouple themselves from the central banks’ control.

It is only at this stage that measures of total money, such as M2, M3 or true Austrian money supply starts expanding at an accelerating rate.

The Fed is finally forced to step in and raise the FFR sufficiently to bring monetary expansion back under control. The economy is described as “overheating”, with employment full and there are unfilled vacancies. Price inflation will have picked up, and supply bottlenecks appear. Expansion rapidly turns into crisis.


The crisis develops

It should be obvious that as interest rates are raised sufficiently to bring demand for credit under control, companies overloaded with debt are the first to fail. A rash of minor failures is enough to change business attitudes. Suppliers tighten up on credit policies with their customers, and banks become cautious. Those relying on debt finance find facilities are withdrawn, insolvency beckons and failures accelerate.

All that’s needed to trigger the crash is a rise in interest rates to slow the expansion of credit. It is a feature of monetary policy that randomness, the principal characteristic of a sound money, free-market economy, is destroyed by credit expansion. Instead of businesses succeeding and failing all the time as individual businessmen continually reallocate capital to where it is most profitably employed, they are motivated instead by the availability of cheap credit. The recovery phase of the cycle sees unprofitable businesses prevented from failing. While central banks profess to use monetary policy as a tool to maintain consumer confidence, they end up bunching all the failures into one great crash.


This time could be a little different

We are not at the crisis stage yet, but perhaps at the start of the expansion phase. The dividing line between recovery and expansion is always fuzzy. Insofar as we can judge, Japan, the Eurozone and Britain may be entering the expansionary phase. America is still debateable. The banks everywhere still appear to be cautious with respect to lending to SMEs, though it could be beginning to change.

Unemployment levels in most countries have fallen significantly, even allowing for self-serving government statistics. But wage levels for skilled labour are yet to rise, indicating investment in new production is still in its early stages. Statistics, such as industrial production and consumer demand, are still mixed. However, prices of key commodities, such as copper, have been persistently strong of late, indicating that some improvement in conditions globally is beginning to take place.

Admittedly, demand for raw materials is mostly being driven by China’s mercantilist policies, but we must not overlook the recovery in demand from other sources, particularly the Eurozone, Japan and to the surprise of the Remainers, Britain. This is reflected in stronger currency rates against the dollar, the economic signals for America being less bullish. Furthermore, President Trump is adding to economic uncertainty with his isolationist approach to trade and with his political disposition in general.

So, the rest of the advanced world appears to be moving from recovery into expansion, but America remains stuck in the mire. China and other Asian countries are already expanding. China is a special case, being a mercantilist command economy, but India, Indonesia et al, have been in the expansion phase for some time. Dubai is a good marker for the Middle East, with an extreme building and construction boom that has no memory of the dramatic collapse in 2009, when it was bailed out by Abu Dhabi. It is overdue for the next crisis.

While many emerging economies are generally ahead of the advanced countries in the cycle, it is likely that Europe, Britain and Japan are just moving into expansion. The great opportunity, from which America is excluded, is the development of new markets in Asia, led by joint Chinese and Russian initiatives. The EU, led by Germany, is distancing itself from American sanctions against Russia, with an eye on trade opportunities to its east. Brexit is forcing the UK towards free trade, which is a great business stimulant. And Japan, with most of her industrial investments in mainland Asia, is benefiting too.

These economies are now set to expand, a phase that will end when interest rates are raised to a level sufficient to crash them once more. America, burdened with the accumulation of debt and attitudes to trade that excludes it from much of the expansion elsewhere, might hardly participate in the global expansion phase at all, before being undermined by the next credit crisis.

A weakening dollar is a consequence of these developments. For a world expanding without America, there are too many dollars abroad. Far better to dispose of them for a currency that can be invested in an expanding economy.

Instead of economic expansion, a persistently weak currency is enough to undermine the American bond market bubble. Rising commodity prices expressed in dollars, driven by both a weak currency and Eurasian expansion, inevitably results in American stagflation. The Fed, at some stage, will still have to raise interest rates sufficiently to trigger a credit crisis, even if America never gets the benefit of the expansion phase of the credit cycle.

Quite possibly, falling bond prices will do for the Europeans first because their banks remain highly geared. Presumably the ECB will step in. However, eventually we will have the crash, and embark on the next credit cycle, which is bound to be different from the current one. The constant is always monetary policy. Central banks will again expand the quantity of base money to prevent the destruction of credit. Perhaps they might succeed. Eventually, the dollar and the currencies tied to it will be destroyed by a combination of monetary inflation and loss of confidence. But that’s a story for the next credit crisis when it is upon us.


The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.