Author Archives: Zarathustra

About Zarathustra

BS Business Management (magna cum laude), Park University, Parkville, MO (1992) AS Medical Laboratory Technology, Community College of the Air Force (1987)

6 Myths about Money & Banking – Josh Ryan-Collins

  By Zarathustra | May 5, 2012 - 10:47 |
18 Comments

Josh Ryan-Collins, author of the book Where Does Money Come From?, explains how banks create money, out of thin air, through the accounting process they use when they make loans. He also addresses 6 common myths about money and banking prevalent in mainstream economics.

The 6 myths about banks and money are:

  1. That banks are intermediaries between savers and borrowers
  2. That money is created through the ‘money multiplier’ and the amount of money depends on the amount of ‘base money’ created by the central bank
  3. That interest rate adjustments affect bank credit creation
  4. That credit allocation is demand driven, rather than controlled by banks
  5. That the banks know what’s best for the economy
  6. Regulating (or democratising) credit creation doesn’t work.

Re-posted from: http://www.positivemoney.org.uk/how-banks-create-money/6-myths-money-banking-josh-ryan-collins/

I re-posted this from Positive Money because so many of our conversations in the comment and reply threads find us divided on the question of whether or not the government creates money when it issues securities to load its account with the central bank.

Josh Ryan-Collins makes the point at 00:24:27, “Governments do not create new purchasing power through issuing bonds; they can only create new purchasing power if they directly put money into circulation …”

I am aware that some new money is created when commercial banks purchase treasury securities; at 00:09:58, “… the third way [commercial banks] create new money is by buying existing financial assets … government bonds …”

Some of these treasuries will be resold to the public extinguishing the money in circulation, others will be purchased by a Federal Reserve Bank which will extinguish money in circulation but will create reserves for interbank use.

As explained beginning at 00:13:04, “… reserves are required within the system … for interbank payments … they just have to have enough reserves to clear at the end of each day all of their payments to other banks … that’s the only way banks can settle with each other within the closed loop of the intrabank payment system.”

He continues, “Central bank reserves can only be created by the central bank, and they can only exist within the interbank market, the interbank trading system. We can’t get central bank reserves; it’s just a different kind of money, it’s a ‘money of final settlement’ within the banking system.”

I’m pleased with that phrase, “money of final settlement” and I think I will begin using it.

I don’t think it can be honestly said that reserve money NEVER finds its way into circulation. In an exchange with the Mystic some time back we agreed that reserve money “leaks” into circulation, but the mechanics of how this happens aren’t easy to address. Can we  agree that almost all of the money in circulation is created by commercial lending to businesses and individuals and almost none of the money in circulation is created by expanding reserves or lending to government?

BASICS – Federal Funds

  By Zarathustra | February 9, 2012 - 09:21 |
5 Comments

Federal Funds are collectively the reserve accounts of commercial banks held with the Federal Reserve Banks. There is a statutory minimum reserve requirement for commercial banks to maintain 10% of transaction deposits and 0% on time and other types of deposits.

Transaction deposits are all of those types of deposits that can be withdrawn as cash at the bank window or could be transferred to another account with a check or credit card. In short this is the money that we use every day to do business. We used to do most of business with paper and coins and so it used to be very important to have a lot of vault cash available.

Today, most transactions are interbank transfers and clearing these checks and EFTs is the real reason why banks must maintain reserves. Accounting is a kind of religion that demands positive numbers in the account balance box at all times. The banking crisis of 2008 occurred when the system that keeps these numbers in the positive range began to fail and the otherwise smooth transfer of credits got all bumpy.

The Federal Funds Rate (FFR) is a privately negotiated rate that banks charge one another for short-term, uncollateralized transfers of excess reserves from one commercial bank account to another commercial bank account that has insufficient reserves. The actual rate that each bank negotiates varies, but the aggregate of these rates is called the effective federal funds rate.

The Federal Reserve Open Market Committee attempts to manage the money supply in such a way as to steer this rate toward what is called the target federal funds rate. The principle tool for doing this is through managing the money supply.

Sometimes banks are unable to negotiate interbank loans and must turn to the Federal Reserve’s discount window. Banks don’t like to do this because when they do they become subject to audits. The most common reason that a bank would have to turn to the Federal Reserve as lender of last resort is because credit worthiness was an issue. The rate charged by the Federal Reserve at the discount window is called the discount rate and is usually higher that negotiated rates. The discount rate is the high end of Federal Funds Rates.

The banking crisis of 2008 occurred when banks that were short on reserves started looking for interbank loans and discovered that there weren’t really enough excess reserves out there to meet the need. As an incentive for commercial banks to maintain higher reserve account ratios, the Emergency Economic Stabilization Act of 2008 authorized the Federal Reserve to begin paying commercial banks interest on the money that they held in reserves, both required reserves and excess reserves.

The Federal Reserve currently pays commercial banks 0.25% on all required and excess reserves. A commercial bank that loans its excess reserves to another commercial bank stands to loose 0.25% interest so this sets the bottom for the range of Federal Fund Rates that banks charge one another with the discount rate being the top and the effective rate being the aggregate and the target rate being what the Federal Reserve hopes they will charge one another.

It might be asked who pays the rates established by the Emergency Economic Stabilization Act of 2008 and how much money are we talking about.

The Federal Reserve surrenders to the US Treasury ALL profits after expenses except for a statutory dividend of 6% which it pays to its member banks. This simple interest payment of 0.25% on the current reserve balance of roughly $1.6 trillion creates an expense to the Federal Reserve that is roughly $4 billion. That means that the US Treasury will receive $4 billion less and will have to either tax or borrow to make up for the loss.

A few very large banks benefit from this program in great disproportion to the remaining banks. The quantitative easing policies of the Federal Reserve have created an unprecedented $1.5 trillion is excess reserves almost all of which are held by just a few banks and which cost taxpayers $3.75 billion in interest paid to their accounts. Even with all of these excess reserves, new lending is not staying ahead of the demand for growth in money supply.

Deeper Roots of World Financial Crisis – Bernd Senf

  By Zarathustra | April 4, 2011 - 15:05 | ,
13 Comments

In Europe, Dr. Bernd Senf, Professor emeritus of Economics at the University of Economics (FHW) Berlin, is something of an Internet star as a result of his interviews regarding the world financial crisis. Almost all of his interviews are in German so many English-speaking monetary reform advocates have not heard his message.

Deeper Roots of World Financial Crisis And Necessary Consequences is a lecture gy Prof. em. Dr. Bernd Senf given in the 9th August 2010 in Berlin. This may be the only recorded lecture given in English.

Bernd Senf – Deeper Roots of World Financial Crisis Part 1 of 3 (73:20)

Bernd Senf – Deeper Roots of World Financial Crisis Part 2 of 3 (1:13:20)

Bernd Senf – Deeper Roots of World Financial Crisis Part 3 of 3 (15:50)

This lecture is NOT for the light-hearted. Dr. Senf teaches us as if we were his college students.

Beyond Food Miles

  By Zarathustra | March 11, 2011 - 12:17 | ,
8 Comments

Originally posted Mar 9, 2011 on the Post Carbon Institute website by Michael Bomford.

NOTE: The following article is concerned strictly with the energy equation of the food sytem and is intended to stimulate questions about how best to grow, transport, store and prepare (ideally local) foods. There are many reasons to favor local food, including supporting local economies and building local food security.

“There is nothing as deceptive as an obvious fact”
-Sherlock Holmes

A locavore is “a person who endeavors to eat only locally produced food.”[1] What better diet could there be for an energy constrained world? After all, feeding Americans accounts for about 15% of US energy use,[2] and the average food item travels more than 5,000 miles from farm to fork.[3] It seems obvious that eating locally will go a long way to reducing food system energy use.

Yet cracking the case of America’s energy-intensive food system demands that we look beyond the obvious. A local diet can reduce energy use somewhat, but there are even more effective ways to tackle the problem. Single-minded pursuit of local food, without consideration of the bigger picture, can actually make things worse from an energy perspective.[4]

If you realize you’re spending too much money, the first thing to do is figure out where it’s going. Cutting back on pizza won’t make much difference if you’re spending most of your money on beer. Similarly, the first step in reducing food system energy use is to figure out where all the energy is going. That’s what a team of economists working for the United States Department of Agriculture (USDA) did last year, in a report called Energy Use in the US Food System.

Where the energy goes:
Energy used in the food system as a proportion of total energy used in the US in 2002.[5]

The report contains some surprises. Transportation is the smallest piece of the food system energy pie. Even farming isn’t a particularly big contributor. The big energy users turn out to be food processing, packaging, selling, and preparation. Our kitchens command the biggest slice of the pie, using twice as much energy as the farms that grew the food in the first place.

Dissecting that little transportation component of the system offers more surprises. The distance food travels between farm and fork has little impact on how much energy it takes to get there.

How food travels is far more important than how far it goes.[6] Big boats, like freighters and barges, can bring vast quantities of food thousands of miles using less energy per ton than a small truck or car uses to transport smaller amounts of food a few miles. Over land, freight trains are more energy efficient than big trucks, which are more efficient than small trucks. Worst of all are airplanes, which use a disproportionately large amount of fuel for takeoff and landing. In almost every case, flying food uses more fuel than other means of transport, regardless of the distance it travels. Fortunately, air freight still accounts for less than 1% of US food transport.[7]

Since the distance food travels has little impact on total food system energy use, obsessing over ‘food miles’ probably isn’t helpful when we’re looking for ways to reduce energy consumption. When food is purchased from major grocery or fast food chain, the distance to the farm where it grew is probably just a small fraction of the distance it has traveled overall. For every mile between farm and plate, an average food item travels more than three additional miles[8]—but some travel much more and others much less. This means “place of origin” labels give consumers little clue as to how far food has actually come before purchase.

The USDA’s report offers some insight into what kinds of food are made with all the energy going into the system. More than half of that energy it is used for highly processed and packaged ‘junk food,’ like chips, doughnuts, soda pop, and beer. About a third is used for animal products, like meat, eggs, and dairy. A measly sixth goes to the grains, fruits, and vegetables that are the foundation of a balanced diet. In other words, the relative energy we invest in each food group reflects the opposite of how we should be eating. Eating well doesn’t necessarily require a lot of energy; eating badly does.

Inverted food pyramid:
Daily per capita energy input to the US food system exceeds 17,000 Calories before food reaches the home.[9] This is more than eight times the average Caloric requirement for a healthy diet.[10] Most of this energy is used to provide highly-processed, high-Calorie foods.

Buying from the local farmers’ market offers great opportunities to cut down on food system energy use, but it’s not because the food there has traveled less than the food at the grocery store. [11] It’s because the aisles of a typical grocery store are mostly filled with highly-processed and packaged food, while farmers markets offer mostly whole or minimally-processed foods. Grocery stores are artificially heated and lit, with plenty of electricity-hungry coolers, freezers, checkouts, and other conveniences. By contrast, farmers’ markets tend to be held in the open air, with few electric gadgets. The farmers’ market saves energy by carving it out of the processing, packaging, and retail segments of the food chain, which are much larger than the transportation segment. From this perspective, the backyard garden offers all of the advantages of a farmers’ market, and then some.

There are even some cases in which growing food locally requires more energy than importing it. For example, produce grown out-of-season in heated greenhouses usually takes far more energy than field-grown vegetables trucked or shipped from a region where they are in season. Growing produce under artificial light can demand even more energy than heating a greenhouse. Energy demands are the downfall of popular futuristic schemes of ‘vertical farms’ in urban skyscrapers.

Highly-processed and packaged foods simply require far more energy than whole foods, regardless of how far they travel. Choosing imported whole foods over local processed foods almost always reduces food system energy use.

The way that food is grown usually has a bigger impact on energy use than the distance it travels. The proportional impact of farming on food system energy use is substantial for whole foods, but trivial for highly processed foods. Since organic farmers reduce agricultural energy inputs by about a third by eschewing synthetic nitrogen fertilizer, choosing organic over local can make sense for whole foods. It makes little difference for highly-processed foods, however. Organic soda pop is still soda pop: Far more energy goes into the aluminum can than was ever used to grow the corn for the corn syrup, organic or otherwise.

Daily per capita energy input to the US food system, by food group and production phase, excluding household energy use.[12]

Choosing local food is one way to reduce food system energy use; but even more effective ways include:

1. Choosing whole foods over processed foods;
2. Getting a small, energy-efficient refrigerator and getting rid of extra refrigerators;
3. Replacing animal products with grain and vegetable-based proteins;
4. Drinking tap water instead of processed beverages;
5. Choosing food that was grown in a region well-suited to the crop, using methods that build soil and rely primarily on sunshine for energy and rainfall for water.

By combining tactics we can eat well using much less energy than we currently do. An understanding of the food system helps put our various food choices in context. Following a single, hard-and-fast rule—even a seemingly-obvious one like “always eat local food”—can lead us astray.

–
Michael Bomford is a research scientist and extension specialist at Kentucky State University, an adjunct faculty member in the University of Kentucky Department of Horticulture, and a Fellow of Post Carbon Institute. His work focuses on organic and sustainable agriculture systems suitable for adoption by small farms operating with limited resources. His projects examine practical ways to reduce food system energy use and meet farm energy needs using renewable resources produced on-farm. Michael has a Master of Pest Management from Simon Fraser University, and a PhD in Plant and Soil Sciences from West Virginia University, where he conducted research on one of the nation’s first land grant university farms operated entirely according to national organic standards.

Endnotes

[1] New Oxford American Dictionary.
[2] Patrick Canning, Ainsley Charles, Sonya Huang, Karen R. Polenske, and Arnold Waters. Energy Use in the US Food System. U.S. Department of Agriculture Economic Research Service. (ERR-94) 39 pp, March 2010.
[3] Christopher Weber and H. Scott Matthews. 2008. Food Miles and the Relative Climate Impacts of Food Choices in the United States Environmental Science and Technology 42: 3508-3513.
[4] This article is concerned strictly with energy. Other reasons to favor local food include supporting local economies and building local food security.
[5] Graph by Michael Bomford, based on data in Canning et al, 2010, Figure 7, p. 20.
[6] Weber and Matthews, 2008, op. cit.
[7] Ibid.
[8] Ibid.
[9] Graph by Michael Bomford, based on data in Canning et al, 2010, Table 6, pp. 22-23. ‘Fruit & vegetable’ group presented here sums fruit, vegetable and processed produce categories from original. ‘Meat & eggs’ group sums beef, fish, poultry, pork, other meat, and egg categories. ‘Dairy’ group sums milk and dairy categories. ‘Beverage’ group sums alcohol and beverage categories. ‘Oils, sugars, snacks & baked goods’ group sums oil, sugar, baking, and snack and processed food categories. Pet food category and household energy use excluded. Units converted from BTU per year to Calories per day.
[10] Stacey Rosen, Shahla Shapouri, Kathryn Quanbeck, and Birgit Meade. Food Security Assessment, 2007. U.S. Department of Agriculture Economic Research Service. (GFA-19) 55 pp, July 2008
[11] Steve Martinez, Michael Hand, Michelle Da Pra, Susan Pollack, Katherine Ralston, Travis Smith, Stephen Vogel, Shellye Clark, Luanne Lohr, Sarah Low, and Constance Newman. Local Food Systems: Concepts, Impacts, and Issues, U.S. Department of Agriculture, Economic Research Service. (ERR-97), May 2010.
[12] Graph by Michael Bomford, based on data in Canning et al, 2010, Table 6, pp. 22-23. ‘Fruit & vegetable’ group presented here sums fruit, vegetable and processed produce categories from original. ‘Meat & eggs’ group sums beef, fish, poultry, pork, other meat, and egg categories. ‘Dairy’ group sums milk and dairy categories. ‘Beverage’ group sums alcohol and beverage categories. ‘Oils, sugars, snacks & baked goods’ group sums oil, sugar, baking, and snack and processed food categories. Units converted from BTU per year to Calories per day.

Reposted with permission from the Post Carbon Institute website.

Bernanke Unveils ‘State of the Economy’ Report (partial transcript from C-SPAN)

  By Zarathustra | March 1, 2011 - 14:27 |
1 Comment

long-term rising oil price concern
WASHINGTON, DC
Tuesday, March 1, 2011

Senator Mark Kirk, R-Illinois
Federal Reserve Chairman Ben Bernanke

Opposition to State bailout? Accelerated borrowing to bail out States? Deferring payment from States on loans made by the Federal government?

It is a Congressional matter.

1:56:12

K: In your testimony on page five, “We are considering providing additional monetary accommodation through further asset purchases. In November, the committee announced that it intended to purchase an additional $600 billion in long-term Treasury securities in the middle of this year.”

In more layman’s terms, you’re talking about lending money to the U.S. government? Correct?

B: Well, not exactly, because we are buying these securities on the secondary market. So, somebody has already lent the money directly. But, yes, we are holding government debt.

K: My point exactly. Sec. 14 of the Federal Reserve Act legally prevents you from buying newly issued securities, which in layman’s terms would be lending directly to the the U.S. government.

B: That’s why we are not doing that.

K: Right, but instead what yu do is others lending to the U.S. government and then you buy their loans.

B: Well, we do that all the time, and even in most normal conditions.

K: Correct. The CRS says in modern times the Fed has always held Treasury securities as part of normal operations. But, now under QE2, it’s a $600 billion commitment? But the CRS goes on to say, “But, none-the-less, the Fed’s purchase of Treasury securities on Federal budget is similar to monetization, whether the Fed buys securities on the secondary market or directly from Treasury. When the Fed holds Treasury securities, Treasury must pay interest to the Fed as it would to any private investor. These interest payments, after expenses, become part of the profits of the Fed. The Fed, in turn, remits 95% of the profits to the Treasury where it is added to the general revenues.” CRS concludes, “In essence, the Fed has made an interest-free loan to the Treasury because almost all of the interest paid by the Treasury to the Fed is subsequently sent back to the Treasury.”

Would you agree with that?

B: Yes, we’ve remitted $125 billion to the Treasury in the last two years. So, it’s important to understand that what we are doing is not fiscal spending; it is in fact purchasing securities which we will then sell back to the market.

K: So, because of Sec. 14 of the Act, maybe the simple way of saying it is, “Others are lending money to the Federal government, you are purchasing those loans, and then the interest payments are being made to you because you are now the holder of … ah … you are the official maker of the loan are then remitted back to the Treasury.” So, maybe in layman’s terms this is one part of the government lending another part of the government money which would not lead to long-term confidence once the American people understood the basics a little bit better?

B: Well, it should be added that we also have a funding cost and as interest rates go up we will have a liability cost as well as an asset cost. So, it may or may not be a return to the Treasury.

1:59:15

B: Monetary policy, even in most normal times, as the CRS says, involves buying and selling Treasury securities. We couldn’t have currency outstanding if we didn’t have securities to back them up.

K: We had a currency for many parts of our history without any Federal debt.

B: When was that?

K: Under the Jackson administration.

B: So this was before the Civil War. This was during the period when individual banks issued currency. We didn’t have a National currency.

K: It’s possible to have currency without a trillion dollar debt?

B: Yes

1:59:55

http://www.c-span.org/Events/Bernanke-Unveils-State-of-the-Economy-Report/10737419880-1/

Are We Coming Out of An Employment Bubble?

  By Zarathustra | February 9, 2011 - 22:50 |
11 Comments

Historically (from 1948 to 1974), households were supported with an employment ratio of between 55% and 58% and a low unemployment rate of roughly 4% to 6%. Then the math problem that is associated with our debt-based money system began to express itself in price inflation. At the same time, the wealthiest few percent and corporations began to pay far less in taxes. The income of the wealthiest few rose and the working class experience wage stagnation or worse declining income.

More people entered the workforce to compensate for the lost buying power of their income. America experience employment churn and instability even as more people went to work and unemployment rose even as the employment ratio rose.

In response the monetary problem and employment instability, the government began to borrow and spend. This fiscal solution appeared to solve the problem and unemployment dropped. But more people than ever were working and taking on second jobs to maintain household earnings.

The Employment Bubble


At the same time, personal, business and government debt were skyrocketing. With more money and cheaper labor we experience an employment bubble with almost 65% of the population working, about 8.5% more than had been working for the previous 25 years.

The employment bubble burst because of the monetary crisis followed by the fiscal crisis. With less money available to employ people and government at all levels hitting its debt ceiling, the employment ratio fell and is now near its historic levels.

Unfortunately, the avarage employee is earning far less than is needed to support even small families. Record levels of reliance on food stamps and other assistance couple with forclosurs and economic hardship are evidence of this new reality.

[youtube]http://www.youtube.com/watch?v=qSczVOfOHN0[/youtube]