Why not just mop them up? The banks are healthy, right?

The link below is to a comic and humorous short story by Irwin Schiff which is a great primer on the Austrian business cycle for beginners; it explains the difference between money and real savings very well.

http://www.scribd.com/doc/7500410/How-an-Economy-Grows-and-Why-It-Doesnt-Irwin-Schiff

“Ron Paul could get his way by default; the Fed could self-destruct without a single shot (legislation) being fired.”

I agree — especially if we have another leg down in the next 12-24 months. However, it is only a matter of time….

The malinvestments have not been liquidated completely–the Fed seems to think they shouldn’t have to be. All those years of cheap money and malinvestment excess have to be reckoned with. The Fed’s pumping will add to the reckoning.

The way the Fed is playing around with things, we could have both deflation and hyperinflation in short order. The Fed is giving itself liquidity trouble by doing something they wouldn’t allow their regulated banks to do: buy gobs of long-term securities at high prices with short-term demand deposits. The result of this madness could derail us for years.

Ron Paul could get his way by default; the Fed could self-destruct without a single shot (legislation) being fired.

It is this second rate that has motivated banks to increase their reserves. It is free money in that they can take money from the FED at the FFR, virtually zero, and put it into their reserves and earn interest, no risk.

Bernanke did thing intentionally to prevent the FED injections of cash from entering the real economy and creating inflation. He would not have to follow Sweden’s example of negative interest rates. All he would need to do is stop paying interest on reserves. But then that would foil is scheme because the money would enter the economy and create stagflation.

Why bother with today’s mainstream news media? Just open any page of Mises’ _Human Action_.

1- “Saving as such has nothing to do with money. For example, if John the baker produces ten loaves of bread and consumes two loaves his saving is eight loaves of bread. In other words, the baker’s saving is

his production of bread

minus

the amount of bread that he consumed. “
http://mises.org/daily/1882

2- “For instance, John the baker has produced ten loaves of bread and consumes two loaves. The income in this case is ten loaves of bread,
and his savings are eight loaves. “
http://mises.org/daily/3640

having worked for a bank I can tell you that we certainly did not borrow money at 0%. We paid for deposits at a certain percentage rate and lent at a higher rate. That’s how banks make money (of course, there are advisory fees, etc. too).

For example, if yields for bonds fall to 2% due to quantitative easing, private financial institutions might be unwilling to lend at such low rates. At this point, the Fed would be printing money to lend, whereas those who receive the new money in the long run would simply “stash it under their beds,” if you will.

The result will be a classical Keynesian liquidity trap, which I believe is consistent with Austrian theory. If the Fed becomes hyperactive, it is quite possible that price deflation actually occurs. The Fed would be “pushing on a string.”

Maybe interest rates aren’t free to perform this function. The author doesn’t say. Maybe not enough borrowers are applying to borrow. The author mentions a decline in the quality of purposes borrowers might have for using borrowed funds. A better discussion of BOTH sides of what is, after all, a TRANSACTION would illuminate the scene better.

For lack of dualized terminology, the author also verges on conflating nominal lending with what I will call “real lending” (analogous to “real savings” in the article). The arguments touch on considerations that seem to me to call for the distinction not only in saving, but in lending and, of course, in borrowing (see above).

Everyone carrying umbrellas when its down pouring is a psychological decision too, but one that has merit. If there is a time when someone goes around with an umbrella otherwise, and others follow, it will only be for a short time until people realize the skies are clear and put theirs away. The State solution would be prohibit umbrellas and Force people out into the rain and tell them that it isn’t raining at all. They will then take credit when it inevitably does stop raining and everyone eventually dries out.

Two guys on two desert islands. Each needs to build a hut. In order to have time to build the hut, each needs to pre-save certain items.

Guy 1 (call him Ludwig) — saves some fish so he has time to build instead of having to fish, sticks for the hut frame, palm branches for the roof and walls, etc.

Guy 2 (call him Ben) — he is happy, he doesn’t have to save any of this stuff. He happened to bring his printing press with him!

Both start building. Which one has the means by which to finish the job?

The only way to have production tomorrow and advance society is to save — real savings based on previously having produced something, not false savings based on ink.

Multiply this 6 billion-fold, the problem is the same — society cannot advance without investment. In order for there to be any investment, someone must previously had to produce and save some portion of that production.

Money serves ONLY as a medium of exchange…Being the medium of exchange, money can only assist in exchanging the goods of one producer for the goods of another producer…Note that people demand money not to hold it as such but to employ it in exchange.

This is misleading. Rothbard says that the other uses of money, notably, a store of value, are simply corollaries of the one great function, medium of exchange. But he implicitly states that money DOES serve the purpose of a store of value; that it can be stored to be used as a medium of exchange in the future as well as the present. Other commodities, that can be exchanged, don’t necessarily have this property. Eggs and Bread can be exchanged, but they cannot be stored indefinitely.

This ability to store a medium of exchange is what most people think of when they talk about saving. It permits one to postpone consumption (for as long as one likes) – unlike with bread, where non consumption can result in a loss of wealth as it goes stale over time.

So, in order for this article to keep on a logical footing, I believe it needs to address this issue. Once I encountered this non sequitur, I had trouble following the rest of the article. It is the same that I often encounter when reading the works of Keynes as well.

However, the explanation of the liquidity trap itself was quite clear, and it did help me to understand what Keynes himself was saying so that further light on this subject would be possible. I can see that something is surely fishy in Keynes analysis, but this article left me stuck on the above issue of savings.