Dow Jones Industrial Average floor?

[Fry]

@ecoshardcore

What Friedman is referring to is that the fed could have provided liquidity to the banks. The fed did in fact buy over 1 billion (1932 dollars) of treasury securities in an effort to boost liquidity. Friedman glosses over this fact.

The Fed kept the interest rate low all through the 20’s. which provoked “capital misallocation” much like the housing boom. Under a 100% reserve banking system, all banks must expand credit simultaneously. If one bank issues too much credit it could be subject to a call by another bank and because it has loaned too much money to meet the call and would immediately become insolvent and be liquidated. Before 1913, this was the cause of many of the financial panics.

What the fed did was enable the banks to expand credit without worrying about becoming insolvent in the event of a run. “the lender of last resort”.
It also enabled the banks to utilize fractional reserve banking to expand credit.

Fractional reserve banking works like this. Suppose person a deposits 100 dollars in bank b. If the reserve ratio (RR) is 10% the bank only has to hold
10 dollars of a’s money at all times. Banks make money on loans, so bank b loans 90 to person c. The bank still has a liability (a’s 100 dollars) on its balance sheet. Its balance sheet now looks like this.

assets liabilities

reserve 10 100 deposits
loan 90

Person c puts the money into bank d. Bank d then loans out the 10% it can to person e. Bank d’s balance sheet looks like this

assets liabilities

reserve 9 90 deposits
loan 81

This cycle repeats itself. The formula for the “Money Multiplier Effect”
is 1/RR In this case since RR is 10% the money has multiplied by 10 times under fractional reserve. In real life, a 10% RR equals approximately a 4 fold increase in the money supply.

The fed enables the banks to grow credit at an artificial and inflationary rate. The fed kept the rates low for so long that capital misallocation had to occur (home prices, oil prices, commodity prices). When the fed stepped in and attempted to start pricking the housing bubble that it created it created a cascade effect that has caused so much damage to the economy.

The reason I am against interventionist policies and the fed in general is that it destroys the markets natural clearing abilities. The swings in monetary supply that the fed creates through open market operations and through fed to bank lending exagerrate any natural business cycle so that we have boom until confidence is eroded. (mortgage securities losing value) and then a bust followed by a large increase in inflation. (current situation). Intervention in the natural clearing abilities of the free market
would NEVER be needed under a 100% reserve system with a stable and fixed monetary supply.

Inflation as a definition is “a continous increase in the price of a good”.
Inflation is simply the difference between the gdp growth and monetary growth. For example, if gdp grows 4% and the monetary supply is increased 10% we would naturally expect inflation to be in the neighborhood of 6%. Under a fixed money supply a gdp increase would actually mean a DEFLATION.

Now since inflation does not immediately happen, the banks, which are the first to use the newly printed money do not feel any of its ill effects. Inflation is felt most by us, the consumers. Inflation is a hidden regressive tax and affects the common man by eroding into the purchasing power of the dollar.

The fed has a dual mandate. High economic growth and low inflation, and low unemployment. Output in an economy is Y=F(K,L) where Y= output and
K and L are capital and labor respectively. So output is a function of capital and labor with any extra growth being technological improvement.
The fed increases Output (Y) through capital (K) by inflating the monetary supply. Eventually the equations have to equal out and that is when we run into situations like this. If there were no fed the business cycle would be much smoother and there would be no labor shocks in recessions. Hence stabilization is chaos.

Seeing Friedman talk about the fed like that is comical since he was not a supporter of it for many of the same reasons I just put down.

If this didnt help, let me know and I will try to sort things out more.

Didn’t catch that when you first posted it. It hasn’t all gone into my skull yet, but was an interesting lesson.

For a period of time we had no central banking system. I think it was like 60 years in the late 1800’s or something. Does data from that experiment support your hypothesis? Was the money supply stable during that time?

[Blue_Eyed_Devil]

^That is part of the problem, people don’t know the history of the Fed.

[Fry]

That and macroeconomic data is clear as mud.

My thing is that for the last 60 years or so the USA has practiced primarily Keynesian economics, no? The last 60 years have seen economic growth the likes of which the world has never seen before.

On top of that, since we switched to a fiat money system year over year changes in the value of the dollar have been stabilizing. Natural swings in inflation/deflation have been getting smaller.

[Penfold]

technology can account for a lot of the growth in the form of increased productivity. We dont have the last 60 years of american growth through a gold reserve and no central bank to compare it to however. Besides tech a lot of the more recent growth can be attributed to the economy as one giant ponzie scheme. If it is to good to be true…well, we are paying for it now.

[Blue_Eyed_Devil]

Bump like woah. <7000.

[Geehee]

i didnt think it would take this long to get here.

[ILC]

and sadly some people (IE warren buffet) don’t think we are out of the water yet. 5000 is possible.

[cougarspeed]

@ILC

and sadly some people (IE warren buffet) don’t think we are out of the water yet. 5000 is possible.

Warren has been buying his ass off. Maybe another thing people should take note of.

[ILC]

@cougarspeed

Warren has been buying his ass off. Maybe another thing people should take note of.

fuck yea dude. he is in the perfect position to do so too

[Blue_Eyed_Devil]

Consumer spending was up last month for the first time in 6 months, I guess that news didn’t help much this morning.

[j_espo1]

@evolve

i didnt think it would take this long to get here.

word.

[Carnut]

traderbase mike was telling me about his predictions based on indicators for a low 6000 floor a few months ago. I’ll bet he nails it again.

[Penfold]

buffet claims he has been buying but he doesn’t have to disclose private transactions.

He said he bought a of billion of GE at $20ish

so if you trust his judgement you should be buying like crazy at $8ish right now.

Of course, his was prefferd stock…

[cougarspeed]

@ILC

fuck yea dude. he is in the perfect position to do so too

Yea id have to look for the qupte but he basically said to buy when everyone else is selling and sell when everyone is buying. Sounds too easy but mentally people are so afraid to buy right now but yet everyone loves to buy during long bull markets. Anyhow i started me set it and forget it trades last week. Once its all set ill do basic maint every once in awhile but its staying how it is for 5-10 years.

[cougarspeed]

@Penfold

buffet claims he has been buying but he doesn’t have to disclose private transactions.

He said he bought a of billion of GE at $20ish

so if you trust his judgement you should be buying like crazy at $8ish right now.

Of course, his was prefferd stock…

Glad you mentioned that at the bottom because the deal he got was fin sweet and has annual yields better then most cd’s and it the stock itself will go up over time as well. I promise he is no dummy and id follow his investments any day.

[Willybeen]

6700 here we come!!!

[ecoshardcore]

i voted 6000-6500, but I think we will see a floor around 5200-5500

[Fry]

OMG MONEY IS DISAPPEARING FROM THE FACE OF THE EARTH!

[cougarspeed]

@Fry

OMG MONEY IS DISAPPEARING FROM THE FACE OF THE EARTH!

[theblue]

where does it go?