‘Now We Are At The Lower Bound’: Draghi At The Dead-End Of Keynesian Central Banking

Europe is not growing much because most of its economies have been crushed under a mountain of debt, taxes, welfarism and statist dirigisme. Yet somehow the foolish pettifogger running the ECB thinks that driving the cost of money to the ‘lower bound’ (i.e. zero) will help overcome these insuperable – and government made – barriers to prosperity.
Yet in today’s financialized economies, zero cost money has but one use: It gifts speculators with free COGS (cost of goods sold) on their carry trades. Indeed, today’s 10 basis point cut by the ECB is in itself screaming proof that central bankers are lost in a Keynesian dead-end.
You see, Mario, no Frenchman worried about his job is going to buy a new car on credit just because his loan cost drops by a trivial $2 per month, nor will a rounding error improvement in business loan rates cause Italian companies parched for customers to stock up on more inventory or machines. In fact, at the zero bound the only place that today’s rate cut is meaningful is on the London hedge fund’s spread on German bunds yielding 97 bps – -which are now presumably fundable on repo at 10 bps less.

This post was published at David Stockmans Contra Corner on September 4, 2014.

The Real Reason American Capitalism Is Failing

The Real Reason American Capitalism Is Failing We’ve come to China to check on our investments. Not that we have many. But the fewer you have, the more each one is important to you. Of all the world’s major stock markets, only two are reasonably priced. China is one. Russia is the other. We are long-term bullish on both.
It is raining here in Beijing. Outside, the roads are clogged with slowly moving traffic. The scene appears normal for a big city. It could be New York, London or Paris. What is remarkable about the view from our window is that it came about so fast. Never before have so many people moved so quickly into the modern world.
Paris looked much like it does today after Baron Haussmann completed his makeover of the city in the 1850s and 1860s. The London skyline has changed significantly over the last few decades – with the addition of many new landmarks, such as the London Eye, The Gherkin and The Shard. But the basics of the city were put together over hundreds of years and remain relatively unchanged.
New York, too, was largely completed 60 years ago. But modern Beijing is brand new. A few years ago, it barely existed. In 1979, when former Chinese leader Deng Xiaoping announced that henceforth it was okay to make money, there were few decent roads… few decent cars… and few decent bars in Beijing. Now, they are all over the place.

This post was published at Acting-Man on September 4, 2014.

The Unseen Costs of the Minimum Wage

A recent article at US News and World Report by Pat Garofalo quotes Associated Press writer Christopher Rugaber who says that ‘US states that boosted their minimums at the beginning of the year, the number of jobs grew an average of 0.85 percent from January through June. The average for the other 37 states was 0.61 percent.’ However, this appears to be another example of the Broken Window fallacy refuted by Frdric Bastiat in his famous essay ‘That Which is Seen and Unseen.’ In the introduction Bastiat states that
in the economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause – it is seen. The others unfold in succession – they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.
By raising wage rates, the public can see their states’ minimum-wage earners making more money. This is the factor that is seen. What is unseen is the number of jobs destroyed or citizens who would have been able to obtain jobs if the minimum wage were never raised in these states in the first place.

This post was published at Ludwig von Mises Institute on Thursday, September 04, 2014.

Are US Consumers Evil Hoarders?

Another Keynesian Meme Dragged Up A recent Fed paper reports that the Fed’s wild money printing orgy has failed to produce much CPI inflation because ‘consumers are hoarding money’. It is said that this explains why so-called ‘money velocity’ is low.
The whole argument revolves around the Fisherian ‘equation of exchange’, as you can see here. Now, it may be true that the society-wide demand for money (i.e., for holding cash balances) has increased. Rising demand for money can indeed cancel some of the effects of an increasing money supply. However, it should be obvious that there is 1. no way of ‘measuring’ the demand for money and 2. the ‘equation of exchange’ is a useless tautology.
Consider for instance this part of the argument:
‘Though American consumers might dispute the notion that inflation has been low, the indicators the Fed follows show it to be running well below the target rate of 2 percent that would have to come before interest rates would get pushed higher.
That has happened despite nearly six years of a zero interest rate policy and as the Fed has pushed its balance sheet to nearly $4.5 trillion.
Much of that liquidity, however, has sat fallow. Banks have put away close to $2.8 trillion in reserves, and households are sitting on $2.15 trillion in savings-about a 50 percent increase over the past five years.’
(emphasis added)
First of all, banks have not ‘put away’ $2.8 trillion in reserves; in reality, they have no control whatsoever over the level of excess reserves. They are solely a function of quantitative easing: when the Fed buys securities with money from thin air, bank reserves are invariably created as a side effect. Credit can be pyramided atop them, or for they can be used for interbank lending of reserves, or they can be paid out as cash currency when customers withdraw money from their accounts. That’s basically it.

This post was published at Acting-Man on September 4, 2014.

Icahn, Soros, Druckenmiller, And Now Zell: The Billionaires Are All Quietly Preparing For The Plunge

“The stock market is at an all-time, but economic activity is not at an all-time,” explains billionaire investor Sam Zell to CNBC this morning, adding that, “every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue; and when you got a demand issue it’s hard to imagine the stock market at an all-time high.” Zell said he is being very cautious adding to stocks and cutting some positions because “I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking.” Zell also discussed his view on Obama’s Fed encouraging disparity and on tax inversions, but concludes, rather ominously, “this is the first time I ever remember where having cash isn’t such a terrible thing.” Zell’s calls should not be shocking following George Soros. Stan Druckenmiller, and Carl Icahn’s warnings that there is trouble ahead.
Billionaire 1: Sam Zell
On Stocks and reality…
“People have no place else to put their money, and the stock market is getting more than its share. It’s very likely that something has to give here.” “I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking,” he said. “If there’s a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market.”

This post was published at Zero Hedge on 09/03/2014.

What does a ‘good’ Chinese adjustment look like?

People of privilege will always risk their complete destruction rather than surrender any material part of their advantage. Intellectual myopia, often called stupidity, is no doubt a reason. But the privileged also feel that their privileges, however egregious they may seem to others, are a solemn, basic, God-given right. The sensitivity of the poor to injustice is a trivial thing compared with that of the rich.
– John Galbraith, The Age of Uncertainty
Malinvestment occurs when people do stupid things with free money. One of the characteristics of malinvestment is its dominance; i.e., other investments have little chance of competing. Malinvestments always bust and end in liquidation.
– Joan McCullough, writing yesterday in her daily commentary
Worth Wray and I have been writing for some time now about the problems that are developing in China. Worth is somewhat more pessimistic about the outcomes than I am, but we agree that China is problematic. China is the number one risk, in my opinion, to global financial economic stability, more so than Europe or Japan, which are also ticking time bombs.

This post was published at Mauldin Economics on SEPTEMBER 3, 2014.

John Embry: Manipulation causes contrast between gold/silver and platinum/palladium

Sprott Asset Management's John Embry, interviewed by Jeff Rutherford over at Sprott Money News last Friday, says market manipulation explains the fall in gold and silver prices amid the rise in platinum and palladium prices.
He also notes how counterintuitive the fall in gold and silver prices is amid the various worsening international problems. Embry's interview is 8:34 minutes long and can be heard at the Sprott Money Internet site.

This post was published at Sprott Money

Subprime Blows up on Retailer, CEO Warns on ALL Subprime, Hits Auto Sales

Selling strung-out American consumers something they can’t afford, can’t get financed elsewhere because they already bought things they couldn’t afford and ruined their credit in the process, and overcharging them for the privilege is one of the most irresistible money makers. These customers are captives. And it boosts sales like nothing else. It’s called subprime lending. It’s risky, as certain lenders, now defunct, found out during the financial crisis.
Now Conn’s Inc., a rapidly growing chain of 89 retails stores selling appliances, electronics, furniture, and mattresses, issued a warning on subprime. A broad warning. It has been offering in-house financing to customers who can’t afford the product and don’t have the credit score to finance it elsewhere.
Business has been booming. In the second quarter ended July 31, same-store sales rose 12% ‘on top of an 18% increase in the prior year and 22% two years ago,’ as CEO Theodore Wright proudly pointed out during the earnings call. The company opened an additional 14 stores in 11 markets over the last five months, and total revenues in the quarter jumped 30% from a year ago to $353 million.
‘The retail segment had another outstanding quarter with higher gross margins, expanded operating margins, and the twelfth consecutive quarter of increasing same store sales,’ Wright said. ‘We are reaching customers that were underserved before, giving low-income consumers the opportunity to purchase quality, durable, branded products for their homes at affordable monthly payments.’
So 77% of its retail sales were financed in-house, with the company borrowing the money to lend it to its customers so that they can buy its products. Conn’s is profiting not only from the sale but also from the loan. Subprime is irresistibly profitable. The portfolio’s average FICO score is 592, with 15% of the portfolio being below 550 (below 640 is considered subprime). It has worked wonderfully before. It has led the housing industry to great success. And the auto industry has come to depend on it. Nothing can go wrong.

This post was published at Wolf Street by Wolf Richter ‘ September 3, 2014.

An “Austrian” Bill Gross Discusses Credit Creation

This month’s Bill Gross letter, notably shorter than usual, is as close to the bond manager discussing an Austrian economics worldview as we will likely ever see him: in brief, it’s all about the credit/money creation, with an emphasis on the use of proceeds of said creation under ZIRP, i.e., malinvestment , or as Gross puts it: “credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring.”
From Pimco’s Bill Gross:
For Wonks Only
A credit-based financial economy (as opposed to pure cash) depends on an ever-expanding outstanding level of credit for its survival. Without additional credit, interest on previously issued liabilities cannot be paid absent the sale of existing assets, which in turn would lead to a vicious cycle of debt deflation, recession and ultimately depression. It is this expansion of private and public market credit which the Fed and the BOE have successfully engineered over the past five years, while their contemporaries (the ECB and BOJ) have until now failed, at least in terms of stimulating economic growth.
The unmodeled (for lack of historical example) experiment that all major central banks are now engaged in is to ask and then answer: What growth rate of credit is enough to pay prior bills, and what policy rate/amount of Quantitative Easing (QE) is necessary to generate that growth rate? Assuming that the interest rate on outstanding debt in the U. S. is approximately 4.5% (admittedly a slight stab in the dark because of shadow debt obligations), a Fed governor using this template would want credit to expand by at least 4.5% per year in order to prevent the necessary sale of existing assets (debt and equity) to cover annual interest costs. That is close to saying they would want nominal GDP to expand at 4.5%, but that’s another story/ Investment Outlook.
How are they doing? Chart 1 shows outstanding credit growth for recent quarters and all quarters since January 2004. The chart’s definition of credit includes the standard Fed definition of private non-financial credit (corporations, households, mortgages), public liabilities (government debt), as well as financial credit. The current outstanding total approximates $58 trillion and has been expanding at an average annual rate of 2% for the past five years, and 3.5% for the most recent 12 months.

This post was published at Zero Hedge on 09/03/2014.

‘Hoarding Money’ – A New Meme?

Fed: US consumers have decided to ‘hoard money’ … One of the great mysteries of the post-financial crisis world is why the U. S. has lacked inflation despite all the money being pumped into the economy. The St. Louis Federal Reserve thinks it has the answer: A paper the central bank branch published this week blames the low level of money movement in large part on consumers and their “willingness to hoard money.” – CNBC
Dominant Social Theme: This money hoarding has got to stop for the economy to get better.
Free-Market Analysis: Sometimes Federal Reserve white papers attract attention and this one does because of the term “hoarding money.” This is a startling phrase and – who knows – perhaps it marks the beginning of a new meme.
Certainly the word “hoarding” is a popular one with government officials. When governments are uncomfortable with the actions of citizens for whatever reason, the term “hoarding” is often applied to stigmatize certain behaviors and encourage others.
In this case, the authors of this paper don’t seem to have in mind stigmatization so much as explaining the phenomenon they are analyzing and suggesting ways monetary policy can alleviate the behavior.
Here’s more:
The paper also cites the Fed‘s own policies as a reason for consumers’ unwillingness to spend. Though American consumers might dispute the notion that inflation has been low, the indicators the Fed follows show it to be running well below the target rate of 2 percent that would have to come before interest rates would get pushed higher.
That has happened despite nearly six years of a zero interest rate policy and as the Fed has pushed its balance sheet to nearly $4.5 trillion. Much of that liquidity, however, has sat fallow. Banks have put away close to $2.8 trillion in reserves, and households are sitting on $2.15 trillion in savings – about a 50 percent increase over the past five years.

This post was published at The Daily Bell on September 03, 2014.

The Great U.S. Retirement Asset Bubble vs Physical Gold Investment

Americans are more deluded than ever as the total value of the U. S. Retirement Market hits a new record. According to the data released by the ICI – Investment Company Institute, total U. S. Retirement Assets in first quarter of 2014 are valued at a stunning $23 trillion, up from $22.7 trillion in Q4 2013.
Not only are U. S. Retirement Assets reaching new record highs, so is the sentiment by its member participants. This report put out by the ICI, ‘Our Strong Retirement System – An American Success Story’ stated:
Americans Report High Levels of Confidence in the 401(k) System
Americans have a very favorable view of the employer-sponsored 401(k) and other DC plans. Such confidence is a powerful indicator of the value American workers and retirees place on the 401(k) system.
In a survey of 4,000 households conducted for ICI in the winter of 2012/2013, 63% of respondents said that they have a ‘very’ or ‘somewhat’ favorable impression of 401(k) and similar retirement accounts (see figure below).38 That support rose to 76% among households that held a DC plan account or an IRA.39 Americans have expressed similarly positive views in surveys conducted since late 2008, despite the stock market decline from late 2007 to early 2009.
It’s nice to know that Americans have a HIGH LEVEL of confidence in their 401K plans. Thus, it makes perfect sense that they continue to invest their hard-earned fiat money into a system that promises them GOLDEN RETURNS. Unfortunately, Americans have no idea whatsoever that they are throwing good fiat money (if there is such a thing) into one of the GREATEST PONZI SCHEMES in history.
I assumed that it was mostly the middle-aged and older Americans that continued to invest in the retirement system. Why wouldn’t they? They see retirement not too far around the corner so it only makes sense to continue contributing.
However, Main Stream Media has also bamboozled the younger folks, as they too have taken the Paper Retirement Asset System….. HOOK, LINE and SINKER. Here is another wonderful piece of propaganda from the same report linked above:

This post was published at SRSrocco Report on Sept 2, 2014.

Did Someone Pay Google News to Run This Group of News Stories?

Am I supposed to believe that Google News’ ‘Editors’ Picks’ section is picked for any other reason than money? Consider today’s ‘hot’ stories about India’s world of computers.
I don’t know who in the United States would regard these stories as news. But I can well imagine that some PR guy hired by a group of programming firms in India could earn his salary this week by persuading his employers that this in some way will generate income for the Society of Indian Programmers, or some such trade association.
This group of stories appeared about 4:30 a.m., EDT. It was gone by 5 a.m. So, hardly anyone saw these ‘picks.’ If some schnook in India paid money for this, he should be fired.
I look at this section of Google News every day with this question in mind: ‘Who have the folks at Google persuaded to pay good money to run stories in ‘Editors’ Picks’ today?’ This is because I cannot imagine blocks of stories like this being picked by editors for any reason other than cold, hard, digital cash.
Maybe MSNBC is overlooking a source of much-needed revenue

This post was published at Tea Party Economist on September 2, 2014.

Presenting the most pitifully capitalized central bank in the West [Hint: It’s NOT the Fed]

En route to South America
As the world’s top central bankers gathered at their annual jamboree recently, the governor of Bank of Canada, Stephen Poloz, undoubtedly received envious comments from his fellow money magicians for Canada’s perceived status as a global financial safe haven.
This newly found perception was perhaps best exemplified during a Bloomberg interview, when the CEO of RBC Wealth Management – the biggest financial institution in Canada said that ‘Canada is what Switzerland was 20 years ago, and the banks in Canada are what Swiss banks were 20 years ago.’
This is the new flavor of Kool-Aid. Canada is seen as the new banking safe haven and an ‘island of safety and stability’ because of its perceived sound fiscal position, commodity wealth and solid economic performance.
Now, anytime I see central bankers slapping each other on the back, I’m going to be skeptical. But here at Sovereign Man, our conclusions are all data driven… so we dove into the numbers.
First, the Big Daddy himself – Canada’s central bank.
Any strong, healthy banking system requires a central bank with a pristine balance sheet… specifically, substantial net equity as a percentage of assets.
So how strong is the balance sheet for Banque du Canada?

This post was published at Sovereign Man on September 2, 2014.

Central Banks Have Set the Stage For Another 2008 Type Event

The Central Bank policies of the last five years have damaged the capital markets to the point that the single most important item is no longer developments in the real world, but how Central banks will respond to said developments.
Let us take a moment to digest that. Before 2008, for the most part, when something happened in the world, an investor would think about how that issue would affect the markets.
Today, that same investor will try to analyze how the Central Banks willreact to that issue, not the impact of the issue itself. This is why, for various periods between 2008 and today, the markets would rally on terrible economic data and other economic negatives: traders believed that because the data was bad the Fed would be more inclined to engage in more easing.
After all, why do we invest? We invest because we want to make money. And when it comes to investing, we prefer easy money: gains that have a high probability of success. And thanks to Central Banks cutting interest rates over 500 times and printing over $10 trillion in money since 2008, what’s the easiest way to make money by investing today?
Front-run Central Banks policies.

This post was published at GoldSeek on 2 September 2014.

Wake up, O sleeper. Rise from the dead

Well, I am awake. It is 5:50am here in AZ and I just looked at the AU charts. Who says no manipulation? In the middle of the night when US markets are closed? Moving down on technical pressure? No. easing global tensions? No. this is why I should stop trading! Things were looking fairly bullish Friday afternoon and I decided to stay in my long position. Those criminals! All I can say is ‘Wake up, people.’
At the risk of preaching to the choir… perhaps you’ll want to forward these musings.
Wake up, O sleeper. Rise from the dead.
As people begin to awaken from their slumber – awakening from a dream that all is well, that the economy is recovering, that the government statistics are correct and employment is improving – these people are seeing a grim reality that is not pleasant to look at. No wonder they want to stay asleep.
But even as they sleep, people know in their soul that something is wrong. A feeling they cannot shake.
Our good friend Keg told us about a conversation with colleagues the other day, and how that conversation turned to the economy and politics:
‘So I challenged them by asking what they were doing to protect their families and their assets. Dead silence. Complacency to the max from people that are intelligent and successful in business, know in their soul that something is wrong, yet choose to ignore it and just go on as they always have.’
These people are asleep and afraid to awaken from their dream.
Indeed, those who trust in this current economic system – a centrally planned, manipulative, Keynesian rip-off that stacks the deck against you – are already dead. They will have no chance to prosper in the economy that comes. Their paper wealth will be wiped out, bailed-in or both. The equity in their home will evaporate. But do you think the bankers will forgive the debt out of pity for you? No! They will not. In a deflationary environment, nothing you have purchased with debt will be worth more than is owed. Not your home, not your car, not your new appliances. Those who owe money to banks are debt slaves. And when the economy is so damaged that most cannot continue to make their debt-slavery payments, what will they do? Bankruptcy? Many will consider their lives over.

This post was published at TF Metals Report By Dr Jerome/ September 2, 2014.

Don’t Believe Government About Price Inflation

It is an old adage that there are lies, damn lies and then there are statistics. Nowhere is this truer than in the government’s monthly Consumer Price Index (CPI) that tracks the prices for a selected “basket” of goods to determine changes in people’s cost of living and, therefore, the degree of price inflation in the American economy.
On August 19th, the Bureau of Labor Statistics (BLS) released its Consumer Price Index report for the month of July 2014. The BLS said that prices in general for all urban consumers only rose one-tenth of one percent for the month. And overall, for the last twelve months the CPI has only gone up by 2 percent.
A basket of goods that had cost, say, $100 to buy in June 2014 only cost you $100.10 in July of this year. And for the last twelve months as a whole, what cost you $100 to buy in August 2013, only increased in expense to $102 in July 2014.
By this measure, price inflation seems rather tame. Janet Yellen and most of the other monetary central planners at the Federal Reserve seem to have concluded, therefore, that they have plenty of breathing space to continue their aggressive monetary expansion when looking at the CPI and related price indices as part of the guide in deciding upon their money and interest rate manipulation policies.

This post was published at The Daily Bell on September 02, 2014.

Gold Market Update

Gold and silver are at a critical juncture – either they break down to new lows soon or a major new uptrend is about to start. Which is it? – while we cannot be 100% sure either way, we can certainly attempt to figure which way they are likely to break.
Many have been tempted to conclude, because of the dismal response to date by the Precious Metals to the growing geopolitical tensions in various regions of the world, that this is an indication of intrinsic weakness, and that they are therefore destined to break down soon, but there is another way of looking at it.
The vast majority of investors have no idea just how dangerous the worsening situation with Russia really is. The West is looking for trouble with Russia – and like most people who go looking for trouble, they are going to find it – this is a situation that could quickly lead to a World War. They have made it obvious that they are not interested in compromise – they want to overcome and subdue Russia, and the consequences are likely to be grave – especially for Europe which is on the front line. We have gone into this in detail on the site and will not look at it further here, but it deserves to be mentioned at the outset, because this could drive a meteoric rise in Precious Metal prices – and it could start with a big move that seems to come out of nowhere.
With this in mind let’s now move on to look at the latest gold charts.
We will start by looking at gold’s long-term chart, as we need an overall perspective from the start. On gold’s 15-year chart we can see that despite the rough time it has had over the past 3 years, it still hasn’t broken down from its long-term uptrend – and if this uptrend is valid, then it is clear that a huge upleg could be in prospect from here. If it were to run to the top of its major uptrend channel again, it would result in a massive increase in the price to the $4000 – $5000 area. Of course, the pattern that has formed over the past year could be a continuation pattern to be followed by a breakdown and another steep drop, but this doesn’t look like it is on the cards as it would require a significant easing of geopolitical tensions, considered highly unlikely, and a deflationary implosion, which the money printers will ‘move heaven and earth’ to avoid. Volume indicators on gold’s long-term chart look positive relative to price, with Accum-Distrib line in particular looking strong. This chart makes plain that we are at a critical juncture here.

This post was published at Clive Maund on September 1st, 2014.

The Underbelly of Corporate America: Insider Selling, Stock Buy-Backs, Dodgy Profits

The hollowing out of corporate strengths to enable short-term profiteering by the handful at the top leads to systemic fragility.
Anonymous comments on message boards must be taken with a grain of salt, but this comment succinctly captures the underbelly of Corporate America: massive insider selling, borrowing billions to buy back their own stocks to push valuations to the moon so shares granted as compensation can be sold for a fortune, and dodgy accounting strategies that boost headline profits and hide the gutting of investments in long-term growth. Here’s the comment: “I’m occupying a vantage point that allows me to see what is going on inside the top Fortune 50 companies. I have never seen such rot before. Of the 50, at least 30 have debt at 120% of cash. Most have cut capex, R&D and maintenance by 80%. Most have been borrowing money to do stock buy-backs, while simultaneously selling off business units and doing layoffs.
Of the 50, at least 20 have 100% insider selling. For some, you would have to go back decades to find a point where all of the acting board of directors are selling. In essence, they are paying the mortgage with their credit cards. Without bookkeeping games, there are no solid earnings. There will be no earnings growth. ‘Executive compensation based on stock performance’ is killing corporate America.

This post was published at Charles Hugh Smith on MONDAY, SEPTEMBER 01, 2014.

Austrians, Fractional Reserves, and the Money Multiplier

John Tamny recently wrote a piece at Forbestitled, ‘The Closing of the Austrian School’s Economic Mind’ in which he critiqued certain claims made in Frank Hollenbeck’s Mises Dailyarticle, ‘Confusing Capitalism with Fractional Reserve Banking.’
Tamny goes far beyond taking Hollenbeck to task, asserting that many modern Austrian economists have certain views of monetary policy that are at odds with much of the rest of the contribution of the Austrian School. Tamny’s biggest point of disagreement with Austrians is over the low regard with which many Austrians hold the practice of fractional reserve banking. In so doing, he makes several arguments which cannot stand up to critical scrutiny.
The crux of the Austrian position is that the practice of fractional reserve banking gives ownership claims to the same funds to more than one person. The person depositing the funds clearly has a property claim to those funds. Yet when a loan is made from those funds, the borrower now has a claim to the same funds. Two or more people owning the same funds is what makes bank runs possible. The existence of deposit insurance since the 1930s has minimized the number of these runs, in which multiple owners sought to claim their funds at the same time. The deposit insurance that prevents bank runs really amounts to a pre-emptive bailout of the banks. As this is a special privilege, rather than a natural development of the market, it follows that restrictions on fractional reserve banking would be a libertarian validation of the market rather than the statist interference that Tamny claims it to be.

This post was published at Ludwig von Mises Institute on Tuesday, September 02, 2014.