The Fourteenth Banker Blog

October 10, 2010

Auto Repairs and The Financial Crisis

Filed under: Running Commentary — thefourteenthbanker @ 2:26 PM

The other day my vehicle was making a rubbing/grinding noise that was noticeable on low-speed turns. From prior experience, I knew it was probably wheel bearings, power steering, cv boots, axles or some such. As you can tell, I did not know much, just what I had paid for in previous experiences with similar symptoms.

I received a recommendation for a local auto service place and decided to try them out. After leaving the car with them a few hours, the actual mechanic called me back. Note, it was not a “service advisor” or the intake person. The mechanic told me that the power steering fluid was a little low but he could not detect a leak. He said he topped off the fluid and suggested we just drive the car awhile and see if there is some very slow leak that is undetectable. He also told me that the last person to change the power steering fluid might have just left it a little low. When he paused, my response was “that’s it?”  Yes. I asked if he inspected the front end and he said that he had and there was a cracked CV boot but no wear as yet. He did not recommend changing it because I could drive it awhile and repair the whole thing later, including the axle, for about the same money.

Then he put the business owner on and I asked him how much it would be. “Nothing”, he said. No service fee, no charge for time, no charge for fluid. I told him he had a customer for life.

The business itself appeared to be quite successful. While not on a main street, there were two nice new buildings and plenty of apparent work, which could only come from word of mouth. This place had zero street visibility.

As I was pondering this later, it occurred to me that the staff must not be under “metrics” and “goals”. Rather, they had an innate desire to provide a quality customer experience and to do the right thing for the client. They had a faith that if they did so, they would have a loyal customer that would come back to them when a real repair needed to be done. Do you know what, they are right. I will only go to a new car dealership in the future for a complex problem that only they have the diagnostics to fix, after these guys tell me then cannot handle it. And I trust that they will tell me that if it is the case.

I did a quick internet search and quickly found a site that discussed metrics for Service Advisors. The terminology that began to jump out at me reminds me of that we find at large banks and corporations of every stripe. There are lots of metrics and the article discusses how if you compare individuals on the metrics the measures go up. Apparently in the auto repair business, metrics are such things as:

  • Average up-sell per advisor
  • Additional recommendations per Repair Order
  • Additional average Customer Pay per Repair Order
  • Warranty to Customer Pay conversion

Customer declining of these additional up-sells are seen as a problem, so the industry has developed tools and techniques to overcome objections. They have found that if the advisor walks the customer through each recommended repair and “prioritizes” its importance, the customer pays for more repairs. They can use printed reports to help with this. The Recommended Action Plan can itemize all the suggested work and highlights in color (presumably red), those that are most urgent.

Now I have had some experience with this process. I use a variety of places to service my auto based on convenience. If I am out at one office and there is a quick lube next door and I need an oil change, I will just get it done. I may even flush the radiator, rotate the tires, or do something else. Once at a new car dealership, a service advisor gave me this long list of work that he recommended and I asked where did he get this from? He told me that it was basically the list of everything that had to be done at certain intervals. If for example, my car had 80,000 miles on it, he might recommend a timing belt, even though I had someone else change the timing belt six months before. If I was not paying attention or did not remember what I had done, which is more likely the older one gets, I might just authorize the work. It had nothing to do with the condition of the vehicle.

I am not against using metrics. They are important tools for accountability and to compare performance. But they go horribly awry when the metrics are wrong, there is little subjectivity, the compensation is tied to the metrics, the interests of the employee and the firm are elevated above the customer’s interest, the numbers are easily gamed by ethical lapse or cheating, etc. There are also many important work products that cannot be captured by metrics. I would love to see a metric in an auto shop that measures what my mechanic did. We could call it, “Sending The Customer Home Without Charging Them Anything. It might actually be the most important metric of all.

What does this have to do with the financial crisis? There are two competing models here. One model is about extraction and consumption. Extract as much as you can so you can consume as much as you can. The other model is about preservation and investment. My new mechanic believes in preserving my money and investing in the relationship. In so doing, he also preserves his time, does not wear out his equipment, and perhaps provides faster service to other customers. With the time he is not spending doing unnecessary repairs on my vehicle, perhaps he is working on another vehicle, helping his spouse, or playing with his kids. There is a benefit to both of us that cannot be measured in currency.

The current mortgage foreclosure crisis is a result of “extract and consume” thinking. How many tales are there of borrowers that bought more house than they could afford on false “stated income”. The mortgage originators must have been hitting some great metrics and getting big payouts. What about the lenders that made so many loans they did not have time to process the paperwork afterwards. Great metrics. Big payouts. What about the investment bankers that packaged these deals up and sold them to unwitting investors? Great metrics. Huge millions in payouts. What about the banks that loaded up on this stuff, many of them knowing the shortcomings but also knowing that they could get short-term results and that hopefully home prices would rise forever and everything would be fine? Great metrics and fantastic bonuses. What about the Federal Reserve that now owns much of this crap? Oh, never mind.

 

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17 Comments »

  1. Thanks, 14, that metrics bit explains a lot. After the miserable time I had (over 3 1/2 months) trying to get DSL at home, I was so beyond furious at how companies treat us. It’s death by 1,000 cuts – they take a slice off your hind end every time you turn around, but they sure don’t want to give anything in return! Things that would have been included in the price back in the day are now “extras”. I heard a great satire piece on the “extra charges” the airlines come up with recently, that ended with charging for the oxygen that would be delivered via the drop-down mask, should there be an incident, so have your credit card ready. All too close to the truth.
    Someone apparently launched a cyber campaign against YUM Brands because of the shoddy service at a KFC or something – I missed some of the news story – but the take-away was that companies have tried to do everything on the cheap for so long, they have lost sight of the fact that people really do expect to pay for good service, or rather, would rather pay a bit more for good service, than to have crap service on the cheap. Hiring anyone with a pulse and an IQ slightly higher than that is ultimately counter-productive. I just keep waiting for companies to wake up to this and begin to value their people again. Talk about “knowing the cost of everything and the value of nothing” – that’s modern American business. How nice to know your experience with the auto repair shop is still possible.

    Comment by sandi — October 11, 2010 @ 12:21 PM | Reply

    • Sandi,

      I saw this post on huffington yesterday and a nice man (who used to work for a dealership) posted a wonderful comment about how it’s done in the auto service industry. He even posted his website “beingmiddleclass.org” where he had some really good nuts and bolts advice.

      Some times I think Internet might be the creative destruction we’ve all been waiting for.

      Great post! It is nice to know that honesty still lives on….. Specially if it’s in a not so visible location ( it’ll have a better chance of surviving there).

      Comment by Vocalbanker — October 11, 2010 @ 3:38 PM | Reply

      • I agree, Vocal, about the Internet. Like almost anything you can name, from wooden clubs to TV, every tool can be used or abused – it’s all up to us. I can’t help but think (or hope) that those most inclined to be good stewards of business relationships, and all other manner of daily life, are on the ‘Net and trying to “do well by doing good”. Not that there aren’t scammers here, too, but it seems to appeal especially to people of good intent. Or maybe that’s just my inner Pollyanna spouting off again………….
        This whole issue does make one wonder – do businesses not realize the REAL bottom line is trust, and not just the latest quarterly report? If we can’t trust them to provide what they say they will at the price agreed on, we won’t do business with them for long. “Fool me once, shame on you, fool me twice, shame on me”. They are so short-sighted that I wonder if greed and small-mindedness go hand and hand? Every time I read about a situation like New Jersey (tunnel), I am reminded of the many instances I’ve seen where some needed thing was postponed due to “cost”, when the powers that be had to know it would just be MORE costly later. I assume they just don’t want the money spent on their watch (I’m referring mostly to politicians). What ever happened to the days when a “leader” said, “Ya know what folks? This is gonna cost ya, but it will be well worth it in the long run, because it will improve your quality of life, etc. etc.” Where the heck are THOSE guys when you need ’em?

        Comment by Sandi — October 12, 2010 @ 1:43 PM

      • Sandi, the doer people you need are in some sort of political occultation, like the last Imam in Islam. If they opened their mouth politically the screamer personal gooders would assassinate them by inuendo. They would be conspirer’s of some sort. Crooks all before the fact. In infinite variety of accusation too. Why would those that can lead bother anymore to even enter politics? The American people now almost universally prejudge from few to no facts….. The Truther Movement. One of the greatest ways to con is to simply the highly complex. Yet, we are a people that demands ever greater , more useless, complexity in the name of simplicity. The crooks meaning just about everyone in ” business” are ever more required to grab their own piece in the short run. That short run judgement is imposed by the people as a whole. Their politics demands it. Natural born grifters viscerally understand the advantage of the short tale, set up and sting. The other half of the societal equation are those people who believe their personal good defines all in their own good simplicity. Facts mean little to nothing in valuing the desire buried in personal beliefs. Yet, these same people grift along with the crowd too.

        Most of the grown ups when I was a kid, in varying degrees, were no different than the small time grifters surrounding Henry Gondorf in the movie ” The Sting”. This was very much not a special case either. When I was growing up, there were the same people everywhere I went. Most were more slaves to the system than my father’s friends but the same breed that took care of their families anyway the could. The big difference though was that the college educated older persons were mostly employees. Most scammed on the side wherever they could. I had a conselor in the Boy Scouts who was a very big lawyer, Mr. Oppenheimer. I discussed these differences with him when I was an eighth grader. Mr. O. was very forthright. He told me that I was discovering life earlier than most. He was a very funny man and showed me the humor involved. He said,the classical writers understood the problem and the best way to get a handle on the situtation was to understand the words Plato stuffed into Socrates’ mouth. For starters. But the really important thing was to understand people as they are which means being as non judgemental as possible. OK, you want short term results and if I resist your short term belief I get fired? Ok, taking care of me and mine means I deliver what you want. All the screamers will not put their money to keep me and mine alive as we desire it. The screamers desire without putting up.Their desire replaces my desire…. That leads to the national mantra….. Fuuuuuuck Yoooou! Indeed, we as a people are so one sided we cannot abide commonwealth. Well, this problem is now maxed out and it is killing us all. Did not the Athenian Empire really die the same way? They did not even wake up after being defeated in the Peloponnesian War?

        So what is impeding now? My view is that we are being killed by ignorant uncontrolled masses of utopianism. Many different kinds are screaming at each other. But the underlying facts of the way human’s survive together remains the same…. eternal. We get somewhere when the eternal facts of the way we live together stimulate a new middle way. Sooner or later survival forces such a re-emergence. A commonwealth emerges again between different believers to allow society to survive.

        Just how does a vast group discussed by Joe Bageant in his essay ” Drink Pray Fight Fuck” form a commonwealth acceptance of each other with a group of Modern Orthodox Jews represented by Rahm Emanuel? Now throw in a few million other opposing views.

        Comment by Jerry J — October 12, 2010 @ 2:59 PM

  2. 14, you ask an interesting question about the Federal Reserve? Just what crap did they buy? More interestingly ” How did they pay for these assets”. How much of the purchase by the FRB’s cumulatively represents concurrent funds outlay by the banks?

    I am looking at the current Consolidated Balaance Sheet of the Federal Reserve Banks dated October 7, 2010. They own $1,078.539 billion dollars worth. This asset is described in Footnote 4 as ” Guaranteed by Fannie Mae,Freddie Mac and Ginnie Mae. Current fave value of the securities,which is the remaining principal balance of the underlying mortgages.” This Note tells us a great deal. Mortgage backed means that these are pools of actual mortgages because the individual mortgage balance is known. This tells us that they do not hold CDO’s. CDO’s are portions of a number of mortgage pools. It is not possible to carry a CDO at the underlying unpaid principal of individual mortgages since a CDO is a portion of every mortgage contained within the pools aggregated in the CDO. Obviously too, the FRB would know when the GSE guarantee was triggered if they know the details of the underlying mortgage.

    OK, how did the FRB pay for these mortgages? They simply increased the Reserve Deposit Liability Account of the member bank from whom they purchased the MBS. This suggests that substantially all of these purchases were from asset pools of the bank that they previously up the funds to buy the MBS. Certainly, the member bank could have bought these mortgages on the open market or direct from the GSE’s but by doing so they had to have funds to settle up with the seller. That this is obvious takes only a glance at the long time balances in total Member Bank Reserve Account Liability totals. That balance , most recently, is $1,253.413 billions . Within this total are ” other deposits” held by deposit institutions of $ 1,000.014 billions. So, plausibly the member banks might have bought $78 billion of GSE mortgages since March 2009 for resale to the FRB’s. The rest of the MBS’s were already on the books of the member banks when purchased by the FRB’s.

    What I am trying to suggest here is that around $1,000 billion of GSE mortgages were non cash purchases by the FRB’s from member banks. For counterpoint. If the GSE’s sold mortgages directly to the FRB’s for a direct or indirect semi permanent increase in their Reserve Account, where did the GSE’s get live funds to purchase these mortgages?

    Are these mortgages really crap or are they the best of the lot? Obviously, if the FRB’s present mortgages to the GSE’s through their managers for honoring the guarantee, the Treasury will cover the requirement. So, quality must be within constraint’s of a going concern state.

    I keep trying to find out about the foregoing but to no avail. How much of the Fed purchases were a mere bookkeping entry that can be settled only by selling the same MBS’s back to the member banks by a bookkeeping reduction in their Reserve Account?

    Comment by Jerry J — October 12, 2010 @ 5:36 PM | Reply

    • I see my eyesight is missing some typos. I should also add that Bernanke has said that the cash flow from their mortgage receivables is also reinvested. The FRB’s have no credit losses here since they are reimbursed by the GSE’s. So what is the net yield to the FRB’s after manager expenses and so forth. How about 4 %, it is probably greater. Average total asset outstanding must be around $1 trillion over the last 18 months . The foregoing assumptions would cumulatively generate around $ 60 bn more for cash purchase of mortgages from the GSE’s. Taking both estimated sources of buying fresh mortgages, The FRBs could buy around $140-$150 bn as a rough estimate.

      I got onto this added post thinking about all those mortgages that AIG had to payoff the Credit Default Swaps on . AIG became the owner of these Mortgages. The interesting thing is that AIG says they insured only the top tranches of these mortgages. That means they get all interest and principle payments if they bought both sides of the tranche first before any lower tranches get paid. I have no idea what percentage of the total cash flow the tranches that AIG now owns represents. It is probably around 50 %. So, if there is a collapse of even 25 % of the total mortgages AIG still gets all the cash flow including money from selling the secured property. That tells me, they are getting close to 100 % collection on the face values and interest rate on the CDO’s they insured from now own. If they are carried on the books of AIG at zero, the income they record now is awesome. The total was around $85 billion to start with as I remember plus it must have grown substantially . At $100 bn of original cost carried at zero, at 6 % net since they have their existing overhead in place, the annual book profit would be $6 billion. These undoubtedly were 30 year mortgages so they collect the principle and interest till the pool extinguishes itself. At 15 years at 6 % interest they get $190 bn back including principal originally loaned. See why even AIG might be crawling out from under eventually unless the foreclosure mess gets in the way? Undoubtedly , Obama & Company understand this too. The present banking system survives only if they can collect the bulk of the contracted mortgage cash flows.

      Comment by Jerry J — October 12, 2010 @ 10:22 PM | Reply

  3. They own $1,078.539 billion dollars worth. This asset is described in Footnote 4 as ” Guaranteed by Fannie Mae,Freddie Mac and Ginnie Mae. Current fave value of the securities,which is the remaining principal balance of the underlying mortgages.”

    BWAHAHAHAHAHAHA “It’s only money”

    You have to laugh to keep from crying…………..

    Comment by Sandi — October 13, 2010 @ 8:11 AM | Reply

    • The interesting part of all this is that the FRB’s cannot actually “pay” for around $1,000 bn of these mortgage purchases. The ” payment” sits in a “checking account deposit” at the FRB where they almost literally cannot draw the account down other than taking currency in exchange for the deposit. Taking currency would be pointless because almost all of it would eventually be deposited by the banks and returned to the FRB. This act increases the ” checking account deposit” liability back to near where it was to start with. These accounts presently cannot ( mostly) be converted to live bank funds because the FRB is not legally able to issue electronic currency on the same basis they can issue paper currency. Thus, the only way out is to sell the MBS’s back to the banks they bought them from at par. Literally put them in an armored car and ship them back. When this is done the banks will carry them at par just as the FRB does. A huge laundry job here to get out of mark to market or even impairment. One does not buy impaired assets from the Federal Reserve Bank. No accounting firm would even raise the question. Ask yourselves this question. Why would the banks leave their money in a Reserve Account paying a pittance when they could earn around 5 % considering they do not have to pay an asset manager? That is around $50 billion a year compared to around $1.6 billion they would earn on their deposit at the FRB. Why would the banks kiss off all that revenue? After all the FRB’s are recording that same $50 billion in income before managment fees. The banks would collect the GSE guarantee the same as the FRB’s. What is really going on is ” The coast ain’t clear yet to ship them back”.

      This was Bernanke’s most audacious and brilliant move to prevent the panic from reigniting.

      Comment by Jerry J — October 13, 2010 @ 11:41 AM | Reply

      • Krugman’s right – we are now officially a banana republic

        Comment by Sandi — October 13, 2010 @ 1:47 PM

      • Sandi, Krugman recently said that the Federal Reserve Banks had to increase their balance sheets starting at $ 5000.000 billion. As I pointed out above, if the banks do not take down their Reserve Deposit Account as they did before the 2008 crisis, the consolidated balance of the FRB’s Reserve Deposit Liability does not enter the general economy. To prove my point, the Banks Reserve Account totals were only $12.438 bn at August 2008. The total member bank portion of Reserve deposits at October 7, 2010 totaled $1,002.133 bn. That is an increase of 81 times over 2008.

        I am an accountant who spent his life dealing in cash flow subjects. Unless the member banks actually withdraw their Reserve Deposits from the FRB the funds are as good as useless to the general economy. So, I did a simple comparison of the most recent FRB Consolidated Balance Sheet against the same Balance Sheet issued just before the crisis… August 28, 2008.

        Total Federal Reserve Assets increased by $1401.762 bn. Reserve Deposit Accounts also increased by $1228.562 bn. That means that the net of these two numbers , more or less, entered the general economy as injected liquidity… that number is $173.200 bn. The major source of that liquidity , if it be that, and I will explain below, was increased issuance of currency of $122.915 bn. The rest was sourced from activities in other liability accounts. OK, the cash that entered circulation would increase the liquidity ( funds) injected by the FRB’s themselves into the general economy. The increased currency sitting in the bank vaults would not.

        So in terms of direct injections into the real economy, the FRB’s seem to be a minor player. Of course, banks loan their reserves between themselves so that banks short of their reserve rquirements meet the reserve requirement every night. That is not funds entering the general economy outside of any bank not meeting their reserve requirements who borrow to cover. That number, loaned reserves between banks has not increased radically on bank balance sheets comparing August 2008 versus the end of September 2010. The marginal increased reserve loans between banks is not in the hundreds of billions so far as I can ferret out now. Between my two comparison dates there was considerable activity that saved people like AIG etc.

        So, just where is the foregoing wrong bankers? We have not been a currency economy for a very long time. The FRB’s are almost a neuter compared to the Treasury in terms of QE. Guarantees are not funds entering the economy until they are actually funded.

        For Krugman’s $5000 bn asset increase to enter the economy, the funds must be electronic. Where do I misunderstand?

        Comment by Jerry J — October 14, 2010 @ 3:46 PM

      • @JerryJ,

        You are a professional accountant. Curious. What do you make of MMT Modern Monetary Theory?

        Comment by tippygolden press — October 14, 2010 @ 5:35 PM

  4. Tippy, I also have an econ undergraduate degree of now hoary vintage. I am at heart a subscriber to Keynes. I think I still have my copy of ” The General Theory of Employment Interest and Money”. That said, a half century of actually manipulating money cash flows for tax planning substitutes theory with practices that actually occur. I have kept up with aspects of monetary policy politization as it is manipulated by corporate and state bureaucrats. For example, is a US Treasury Bill or Note a debt or money after the advent of Repos? I personally stood in at times in a Treasury function when people were away or on vacation. We had $50- $100 million in bank sweepings that I put into Repos overnight and sometimes longer. I see the Repos as money in every practical sense no different than a demand deposit. Treasuries function as money in the real world. Back in the fifties, I presented an instance where debentures functioned as money in the real world. My grandpa directly paid for a tractor and thresher using a first mortgage gold bond. He clipped the coupon and received gold coin. The implement dealer took the bond and gave change for the amount in excess of the purchase of the tractor and thresher including accrued interest. In 1958, banks literally settled up between themselves or via their Federal Reserve Bank using currency and wires too through their reserve deposits. Those famous $100, 000 Federal Reserve Notes were used just for interbank transactions. Today, with ACH ( Automated Collection and Handling) money is settled by transaction offset at the FRB and wires.) In my view, what constitutes money today is vastly different than during Keynes time. Keynes dealt with rate of interest in a rational market in considering his three basic motives for holding money. There is obviously a lot of hybridization.

    What is money is in the eye of the beholder who possesses the money and what the citizenry believes is money. Obviously, almost every ” investor” in a money market fund considers his technical account receivable from the MMF to be money. The same as his checking account. Until quite recently clearing times on demand deposits was slower than or at least equal to the time it took to get live funds redemptions from a money market account.

    Electronics has changed everything. Currency in the US has a very minor role and is a small portion of what constitutes money today. Cash is mostly not currency if you look at a balance sheet. Even more interesting is the divergence in what is effective currency. Few have a demand deposit account in China. Almost everyone receives currency in payment of their salary. They spend a good chunk of that currency to buy goods and services. For all but the bottom most groups in America people barely use currency. Uncirculating currency does not convert to electronic funds. It winds up back at the FRB. When the Federal Reserve System was created, one wired orders for settlement among correspondent banks that cleared using currency. Currency was the very blood of the system. Not so today since electronics took over. This mostly what I call semi-money today. That said, certainly Keynes three motivations for money still work but what is money is no longer very clear. I think monetary theory needs a lot of reworking. Heaven knows, Friedman’s work has fallen on it’s ass.

    Demand for money is a function of the interest rate within the economy according to Keynes. The liquidity preference. Well, where did absolutely as much money as possible flee two years ago but Treasuries bearing yields of 1/10th of 1 percent. Still there. What this tell me is that a Treasury was money no different than a flight to gold specie as my grandpa did in 1931. The Treasury is payable in funds in dollars or currency and nothing else. In point of fact, barring the goldbug argument, a Treasury is a form of currency bearing interest. All Congress needs to do is say so directly to make it equate to even a $50 Gold Eagle.

    Here is the language from a key Supreme Court Case in 1910. 7 Ling Su Fan v. U.S.

    “Conceding the title of the owner of such coins,yet there is attached to such ownership those limitations which public policy may require by reason of their quality as aegal tender and as a medium of exchange. These limitations are due to the fact that public law gives to such coinage a value which does not attach as a mere consequence of intrinsic value. Their quality as a legal tender is an attribute of law aside from their bullion value. They bear, therefore, the impress of sovereign power which fixes value and authorizes their use in exchange.”

    That is a $50 Gold Eagle is precisely the same as a $50 Federal Reserve Note. Thus, Treasuries which also bear the impress of sovereignty can be automatic legal tender and they have long passed as such unofficially.

    So, what I am saying is that electronics and custom of what is money has changed very much in the past half century. Thus monetary thinking needs a great re study. Besides, does not the post 1971 free floating of currencies alter everything too?

    When Bernanke set out to buy MBS’s off the balance sheet of the member banks at par, not fair value he acknowledged that what constiutes money supply could officially change almost overnight. I referenced above the ” other” category of member bank reserve deposits of literally a rounded $1000 bn. The moment Congress authorizes electronic currency the FRB’s could instantly wire the new kind of funds electronically. Thus the FRB’s would have zero ” other” reserve deposit liability and would have a new liability account of $1000 bn called, I presume, “Electronic Currency Outstanding”. The banks would have electronic funds to lend out of $1000bn.
    Things are so vastly different that older monetary theory no longer describes money transactions.

    So, I do not know what to think anymore of academic ideas about MMT other than a vast disconnect.

    Comment by Jerry J — October 14, 2010 @ 9:25 PM | Reply

    • Obviously, I am pointing out the idea that a Treasury is ” real money” in Keynes’ sense. But monetary ideas are not of much use in a confusing vacuum. The very people fleeing to real money also vehemently consider Treasuries as a debt to them and not real money. Hence, they are obsessive about the ” National Debt”. Having long ago abandonded intrinsic value for almost all of their currency, politically, the citizen is stuck with value derived as an impress of sovereignty. My view, is the schizoid nature of societal views about money causes catastrophic economic and political thinking and aids economic failure. Americans, as a people, it seems, are simply unable to concieve of sovereign . Collective, in particular. Monetary ideas cannot stand alone but must be invested with their social and political integrations. That is hopelessly confused due to acceptance of theory over factual understanding.

      Comment by Jerry J — October 14, 2010 @ 9:56 PM | Reply

  5. You have turned into a great pedagogue Jerry!
    But making Treasuries money would result in inflation and difficulties in selling foreign investors new Treasuries, right?

    Comment by Jakob W — October 15, 2010 @ 6:01 AM | Reply

    • Inflation would depend entirely on circumstances. Distributed Treasuries already exist. The government has already received bank funds which presumably have already been spent. So, inflation from making Treasuries legal tender itself would be neutral. However, vast amounts of deflationary losses have already occurred since the subprime crisis began and created a panic liquidation. Treasuries , off and on, for 200 years have been legal tender. Look at the most infamous Treasury Note as currency of them all. http://www.usrarecurrency.com

      My point is that Treasuries function in the real world as a form of currency. One that earns interest. New Treasuries issued by the USG in a situation where they increase money supply ( foreign purchasers) rather than cancel out deflationary losses MIGHT tend to inflate . When someone buys a new Treasury where the funds of the government increase , spending the money may or may not increase money supply. Certainly, when money comes in from say China to buy a new Treasury the funds enter the system inside the US considered all by itself. If the funds increase winds up going back to China and others the entire effect is cancelled out. Example. China buys $ 1 bn of new Treasuries and the USG for simplicity itself imports $1 bn of oil and sends the payment for the oil in dollars to London for Saudi Arabia where the funds stay in Europe. This does not happen in a single transaction but it does illustrate why inflation is not an easy thing to model.

      Again , my main point is that almost everyone considers the Treasury to be a currency while at the same time considering the Treasury as a debt that the citizen owes. Compare this to your checking account. Your checking account is a debt owed you on demand. The asset pool from which the ability to honor your demand for payment generates is owned by the bank. The bank asset itself is a claim of debt ownership on others since bank assets are loans, receivables and fund claims on other banks , the Federal Reserve Bank and currency. What people do not get is that the state is a sovereign….an entity that acknowledges no higher authority while the bank and citizen is a subject of the sovereign. Only the soverereign or it’s delegate may print money.

      Here is Bernanke himself as quoted by Roger Lowenstein in ” The End of Wall Street” page 260.

      ” The US government has a technology , called a printing press( or today,it’s electronic equivalent),that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S dollars in circulation, or even credibly threatening to do so,the US goovernment can also reduce the value of the dollar in terms of goods and services,which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

      The foregoing is mostly a half truth because few people receive payment in currency other than the black market services area and organized crime activities. People take currency out at the ATM today. When you spend it the recipient deposits the currency and most of it winds up going straight back to the FRB as an increase in the member bank reserve deposit account. In relatively smallish ways currency growth certainly does circulate. As posted above, from August 28, 2008 to October 7, 2010, the FRB’s were only able to increase currency in circulation by $122.915 bn. A mere pittance considering the deflation. Bernanke has proven by action though that he already has the assets to back a massive increase in currency by electronic means. However, the FRB may only issue paper currency. The moment Congress grants the power to issue electronic currency he could plop in over a trillion bucks. Paper currency increases are tough slogging in the US.

      Again , people consider Treasuries to be the equivalent of currency and bank deposits. They once similarly considered Money Market Fund acounts as the equivalent of bank deposits. Treasuries though have the impress of sovereignty to use Justice Lurton’s phrase. Indeed, Federal Reserve Notes themselves have value only due to backing by Treasuries. Yet, people consider them as a debt. On the other hand , a bank demand deposit is a debt in fact and people consider their deposits as equivalent to currency.

      Very, very confused people, what?

      Comment by Jerry J — October 15, 2010 @ 2:33 PM | Reply

      • @Jerry J

        Thanks for your reply. Sometimes when you discuss “electronic currency” you use language similar to MMT. I guess the worthless bonds marked as $____ millions / billions /trillions qualify. I don’t have an informed opinion on MMT or any other theory or school of economics. But my learning curve is improving. I also followed your reference to Joe Bageant. (It’s the first time I’d heard of his name. A very talented social commentator.) The essay is very sad and funny at the same time.

        Comment by tippygolden press — October 16, 2010 @ 11:44 AM

  6. There is an interesting question that shows the disconnect of what constitutes money. I assume currency is always money in a fiat system. Fiat systems are now all but universal. Why did/do people buy Treasuries with literally no yield ? By doing so they risk severe losses if the later sell the Treasuries as yields rise. Why did they not simply convert to currency and put the currrency in a safe deposit vault? I agree that doing so is troublesome given that they would be using $100 Federal Reserve Notes which would quickly be exhausted anyway. Even worse would be the IRS reporting hassle. But, if the purchaser unloads in a panic exit they are assured significant losses. At the least to preserve capital the owners of the Treasuries must wait for maturity. The obvious answer is that people consider Treasuries as the equivalent of currency. Treasury currency circulates on the same basis as high value currency once did. Equally obviously, Treasuries as debt can never be significantly be paid off without removing a vast amount of fungible money supply. Then where would the funds go? Deflationary losses? The so called national debt is really an issued currency account no different than the liability account at FRB’s for outstanding currency. Why is this account a liability as opposed to a capital account given that only a smallish portion of outstanding currency could realistically be withdrawn? Is this nothing but bad habit and poor mythology?

    Comment by Jerry J — October 15, 2010 @ 11:57 AM | Reply


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