On 31 Jan 00 19:42:41, Roberto Verzola wrote:
>that in a banking system with a reserve requirement of 10%, the system
>can lend an amount 9 times larger than actual deposits. If the reserve
>requirement is 5%, it can lend out 19 times as much. And if the
>reserve requirement was just 1%, it can lend out 99 times as much.
American banks now have $2.3 Trillion in checking and savings account
liabilities, yet only $50 B in reserves (vault cash and clearing
balances at the Fed) to cover them. That is a reserve of 2.2%, not the
10% everybody thinks it is. A college classmate of mine is a bank
inspector. She says they are all under major pressure from their
bosses to look the other way unless something is bad enough to get
someone sent to jail.
One reason is the abundance of small banks in the US --- reserve
requirements on the first $50 M of deposits is only 3%. Another reason
is that fractional reserve requirements only pertain to *checkable*
accounts, not savings. The recent tendency towards dis-saving in
America (savings rate is minus-4% if you don't count interest on CDs
and such increases as "savings") has really saved the banks butt on
that one. This whole deal is propped up with toothpicks.
In the case of the US economy, these toothpicks are consumer spending.
That spending has been rising rapidly relative to income. This is
accomplished by borrowing (most borrowers are just about tapped out),
by dis-saving (once the savings are gone they're gone) and by the
wealth effect. People *feel* wealthier because of the rise in their
portfolios. Right now the momentum of the economy is largely dependent
on this wealth effect --- of course those stocks rise because of
consumer spending, but most people don't understand that this is all
simply chasing our collective tail. Throw into the mix that the rest
of the world is relying on the US as spender-of-last-resort, and you
have an incredibly unhealthy situation that looks good only on the
surface.
And, oh, yes. Total American debt is now $25 Trillion, the largest
percentage of it *personal* debt [see below for details]. That $2.3
Trillion I mentioned earlier starts to look a bit paltry, especially in
light of the fact that it is only backed by $50 Bil of more or less
real money in the bank and a total of perhaps $150 Bil of currency
circulating in the US (the rest is overseas). Most of the personal and
corporate loans (which account for almost $20T of the $25T) are backed
by what ...?? Real estate. Now *that* ought to be reassuring .... ;-)
When the music stops and everybody realises that they've already got a
bunch of bad debt and overhanging deflation on their hands they will
try to reflate the economy and stimulate consumer spending by dropping
interest rates drastically. That's what the Japs had to do when it came
unglued over there. Federal Reserve's own internal stock market
valuation system ("Fair Value") has stocks as overvalued by 70% (!) ---
corresponding to an overhanging drop of 41%. That's a DOW at 6500 to
7000, NASDAQ at under 2500, and S&P at about 850. It's 11 PM --- do
you know where your stocks are??
Whole economies can (and do) get badly over-extended, just as families
do. One common way to measure this for an economy is the DEBT:MONEY
SUPPLY ratio. For reasons too complicated to go into here, Money Supply
in this ratio is usually represented by M2-money. Just remember,
however, that as Roberto and I and some others have pointed out, money
supply (the official measurement) can be vastly puffed up in relation
to whatever it is that passes for "real" money these days.
TOTAL DEBT:M2 (USA only)
1929 1.4
1960 2.4
1970 2.3
1980 2.4
1990 3.2
1993 3.4
1995 4.8
1997 5.2
1999 5.4
Total debt is now more than three timess GDP. I've seen farms with
better balance sheets than that forced out of business. Farms, however,
can't print money, and have no power to tax. Nevertheless, when the
$#!^ hits the fan, I'm not sure I'd feel all that confident, even with
a pocket full of Federal Reserve Accounting Unit Dollars
(F.R.A.U.D.)s.
------------------------------
Details on that $25 Trillion of total credit market debt. Source is the
Federal Reserve, percentages as of 30 June 1999.
29% is financial sector debt --- banks owing banks, all offsetting
entries.
69% is non-financial sector.
2% is owed by foreigners
Of that 69% ($17.5 Trillion)
46% is household (37%) and personal business debt (9%)
25% is corporate debt
22% is federal government debt
7% is state and local government debt
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