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Author Topic: The main cause of inflation in Canada is...
Mr. Anonymous
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posted 24 March 2004 05:26 AM      Profile for Mr. Anonymous     Send New Private Message      Edit/Delete Post  Reply With Quote 
fractional reserve banking, the process in which banks are legally sanctioned to create money with little or no backing. Long story short, Canadian - and American, and other - banks can make money (ie. numbers in a computer) with very little overall backing of gold or other valuable property, as little as 0-5% in many cases. As I understand it, it is this situation that has lead to currency collapse/runaway inflation in many countries in the recent past (15 years or so), when people get a hint of how little their money is really worth.

My suggestion: Buy precious metals (both stocks and actual coinage), pay off debts, own some livable property, and keep some cash on hand, as a similar collapse in Canada is only a matter of time...


From: Somewhere out there... Hey, why are you logging my IP address? | Registered: Jan 2004  |  IP: Logged
verbatim
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posted 24 March 2004 05:34 AM      Profile for verbatim   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
I'd prefer a slightly longer story, if you don't mind. How is it possible for banks to make money this way?
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Albireo
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posted 24 March 2004 12:57 PM      Profile for Albireo     Send New Private Message      Edit/Delete Post  Reply With Quote 
This sounds a lot like the Canadian Action Party view. I'm not saying it's right or wrong; just that they were always pushing this idea.
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Mr. Anonymous
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posted 25 March 2004 01:59 AM      Profile for Mr. Anonymous     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by verbatim:
I'd prefer a slightly longer story, if you don't mind. How is it possible for banks to make money this way?

It's possible because the government says it's possible. The logic escapes me as well, the important thing IMO is that this is a real phenomenom, and will in all likelyhood lead to unfortunate results for the vast majority of Canadians when the inevitable crash comes.

I'll leave the history to others here, as I can't offer a concise explanation at this moment. The good folks at Monetary Reform magazine can probably help you out with this though. I believe Milton Friedman has discussed the dangers of this system, as well as proposing a better solution and ways to transition to it.

I would also suggest that this would make a worthy feature article for the Rabble site due to the important benefits of more fully backed/government issued monetary system for the vast majority of people, and the dangers of the current situation.


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Rufus Polson
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posted 25 March 2004 03:22 AM      Profile for Rufus Polson     Send New Private Message      Edit/Delete Post  Reply With Quote 
Leaving aside the question of how much of a worry the banking system is, a side query--

If you expect massive inflation/crash in the value of the currency, then what's the point of making paying off debt a high priority? That debt is going to get way smaller if what you envision comes to pass. And if the bank goes bust, it might disappear entirely. Whereas whatever you bought with the debt is still in your hands. If hyperinflation happens, you could sell your car and pay off the mortgage with the money. Or you could keep on paying it off--if inflation makes the currency worth a tenth as much, a $1000/month payment becomes worth $100/month. That's always assuming you can get raises that come remotely close to keeping up--but still, it's the only expense that will stay constant instead of multiplying.


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Stephen Gordon
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posted 25 March 2004 08:09 AM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
This looks a lot like what was discussed in this thread.

To quote myself:

quote:
Bank lending is constrained by how much people are willing to save; someone, somewhere has to provide the money before the bank can distribute it as a loan. And banks have to make sure that they're able to able to provide enough liquidity in case someone decides to withdraw their savings. Even though there's no reserve requirement, banks find it prudent to keep some reserves on hand, just in case.
The only real discretionary power lies with the authority to print money, so ultimately, the supply of money in Canada is determined by the Bank of Canada. Their control is not absolutely precise, but if they want to engineer an increase or a decrease in the money supply, they can do it.



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DrConway
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posted 25 March 2004 12:52 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Bank lending is, however, pro-cyclical. This would suggest that bank lending, being multiplied several times over the reserve-base of savings the bank has, has a definite impact on production, and thus ultimately on inflation.

PS. Since the loss of the reserve requirement on Canadian banks the only funds they keep on hand is to facilitate check clearing, so any lending they can do they will, if only because otherwise they won't make as much of a profit as they would like.


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Mandos
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posted 25 March 2004 01:06 PM      Profile for Mandos   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
"cheque," Doc! "Cheque." Don't succumb...

I forgive -our --> -or, though. The Romans did not have the superfluous -u-.


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Stephen Gordon
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posted 25 March 2004 01:10 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
I caught him using 'color' on another thread.
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humbleman
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posted 25 March 2004 04:05 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
I think there is another way that the "high power money" is added into a local economy aside from the Bank of Canada. Look at asia, its boom and crash.

Foreign money flows into local asian banks, which triggers lending/credit/money supply growth. Fractional reserve banking does its magic and you have good times. But it ends like all booms, lending turns speculative and the loans start going bad. Then you have a reverse the foreigners run for the hills withdraw their money. Lending/credit/money supply all slow down and local central banks have to print money to save their domestic banking systems.

China has recently grown concerned about this scenario. They have been raising reserve requirements and loan restrictions over the last 3 months. China's major banks are sitting on tons of bad debt. On second thought think I the China lending story is largely an internal story. China's very high saving rates are supplying the very heavy lending rather than foreign money. China could be the utlimate asian bubble. Fractional reserve banking is very interesting when it is positive. Happy times. But when it reverses and money supply/credit/lending turns negative you have a possible contraction that is relative to the expansion.

foreigners add in domestic system

$100*fractional reserves system(depends on the ratios used)= 10000 in actual credit. Good times

foreingers take out money

$100*fractional reserves system(depends on the ratios used)= 10000 in actual credit is taken out of the system. Somebody's loan gets called. Wipeout.

Imagine that on a China scale.

[ 26 March 2004: Message edited by: humbleman ]


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Mr. Anonymous
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posted 26 March 2004 03:50 AM      Profile for Mr. Anonymous     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by Rufus Polson:
Leaving aside the question of how much of a worry the banking system is, a side query--

If you expect massive inflation/crash in the value of the currency, then what's the point of making paying off debt a high priority? That debt is going to get way smaller if what you envision comes to pass. And if the bank goes bust, it might disappear entirely. Whereas whatever you bought with the debt is still in your hands. If hyperinflation happens, you could sell your car and pay off the mortgage with the money. Or you could keep on paying it off--if inflation makes the currency worth a tenth as much, a $1000/month payment becomes worth $100/month. That's always assuming you can get raises that come remotely close to keeping up--but still, it's the only expense that will stay constant instead of multiplying.



I think the best thing to do would be to buy gold stocks, or actual physical gold if you suspect gov't interference in the owning of actual gold. Gold stocks should multiply faster than inflation, my guess is that gold bullion will reach $1200-$2500+ dollars an ounce US, it has reached $800 (higher with current inflation) with much less incentive in the last 50 years.

Paying off debt might be wise as IMO:
- your raises will be very unlikely to keep up with the inflation, at least in any timely fashion, especially as...
- a crash would mean many people (perhaps including yourself) would lose their jobs and therefore be unable to pay aside from that which savings/UI/welfare provides. This would keep wages down, as companies would have an abundance of workers willing to work for cheap(er) wages.
- your bank may call in your loan, or otherwise wildly increase interest rates when the time comes to renegotiate said loan. If you happen to lose your house/car/etc. because of this, you are relatively SOL (Shit-Outta-Luck).

The comment about selling stuff off to pay off your loan would seem to make sense, though I recall seeing pictures during the great depression in the US (a similar event) during which very expensive cars were being sold at very low cost as people were broke and needed the money. Banks and credit card companies might also have a lot of siezed property to sell at relatively low prices to compete with the stuff you are trying to sell.


quote:

foreigners add in domestic system

$100*fractional reserves system(depends on the ratios used)= 10000 in actual credit.
Good times

foreingers take out money

$100*fractional reserves system(depends on the ratios used)= 10000 in actual credit is taken out of the system. Somebody's loan gets called. Wipeout.

Imagine that on a China scale.


or an American one. With people switching from USD (US dollars) to the Euro as a standard currency for stock trading, a tonne of USD are being/will be dumped on the market, further magnifying the situation.

Re. the great depression, I believe Mr. Friedman has implicated the banks on either causing, or in any case exasperating the boom-bust causing the great depression for personal gain. Specifically, they make money off interest on loans, on stocks (they sell them before the crash) and buy precious metals, then seize a lot of property when people can't pay off their loans and must legally forfeit the property put up as collateral.

Also, if memory serves, neither the "Fed" or the Bank of Canada are federal institutions, but rather banks held in private (ie. non-government controlled) hands. The logic for this from the perspective of solid public policy also escapes me...


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DrConway
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posted 26 March 2004 03:54 AM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
The "Fed" is partly government-owned-and-controlled.

The BoC is 100% Canadian government-owned. Legally, in fact, the Finance Minister is the direct superior of the BoC governor, as the law allows the Finance Minister to, at any time, direct the BoC to follow a certain policy, and the governor has to resign if he or she will not follow that policy.


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Rufus Polson
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posted 26 March 2004 02:40 PM      Profile for Rufus Polson     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by Mr. Anonymous:

The comment about selling stuff off to pay off your loan would seem to make sense, though I recall seeing pictures during the great depression in the US (a similar event) during which very expensive cars were being sold at very low cost as people were broke and needed the money. Banks and credit card companies might also have a lot of siezed property to sell at relatively low prices to compete with the stuff you are trying to sell.

The great depression in the US was a case of deflation, rather than hyperinflation. They both suck, but presumably the effects on prices would be different, no? If there was lots of stuff being sold for cheap, presumably that would mean there was not in fact hyperinflation.


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DrConway
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posted 26 March 2004 03:47 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Mm-hmm. During the Depression, in point of fact, prices fell faster than wages, so if you managed to hold onto your job by whatever means possible, you could make a pretty good go of it especially by the mid-1930s when things got a smidgen better.

The thing of note is that inflationary recessions are actually par for the course these days.

When was the last time we saw a negative inflation rate in the last 25 years? Even during recessions these days companies keep putting up prices while laying people off.

It really sucks when your money falls in value and you're unemployed.


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dnuttall
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posted 26 March 2004 04:14 PM      Profile for dnuttall     Send New Private Message      Edit/Delete Post  Reply With Quote 
Dr.C: I'd love to hear your thoughts as to why the difference between interest and inflation has been pretty static at 3%-4% for the last 40+ years.

Interest measures the demand of borrowing money - high interest rates indicates there is a high demand for cash. Low interest rates says there isn't.

Inflation measures the difference between the increase in wages and the increase in productivity.

That the difference is fairly constant suggests to me that there is an underlying reason. I suggest that it has to do with the increase in production (about 2% annually per capita in Canada) + the increase in population (about 1% per year). But I don't know if that is sufficient. Ideas?

[ 26 March 2004: Message edited by: dnuttall ]


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Stephen Gordon
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posted 26 March 2004 04:39 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
It basically means that the size of the capital stock has risen pretty much in line with GDP. The key factor is the growth rate of technical progress.
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dnuttall
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posted 26 March 2004 04:47 PM      Profile for dnuttall     Send New Private Message      Edit/Delete Post  Reply With Quote 
Mr. Anon. has predicted the future, and I don't think he's far off the mark. I take a different bent to come to a slightly different conclusion, but I agree that shit and fans will meet.

The world's ecological footprint exceeded the world's productive land in the early 80's (check Redefining Progress for details). The ecological footprint model underestimates by an unknown amount. When the world reached capacity is a matter of some debate, but the soonest the world's human population reached capacity was about 1950. This is based on the timing of the maximum amount of productive land in the world. Canada will have a ecological footprint greater than our productive landmass in 20 years or less (we're currently at 55%), depending on whether we make good decisions or not. Could be as early as 10 years. The US is consuming 40% over capacity, by purchasing Canada's (among others) excess. Once Canada has no surplus, they won't be able to sell it to the States. Unfortunately, our policies do not allow us to cut off the gravy train, and as the US collapses, so does Canada. World wide oil production will reach it's peak in 2007 (Hubbert's Peak), creating a economic plateau in Canada, where the increase in energy costs balances the increase in energy exports, providing a net balance for around 10 years.

Baby boomers were born between 1947 and 1967, in Canada. They will want to start retiring in about 2012. They will sell assets to convert them to cash (in some way). They will sell them to the younger people who are trying to build up their assets for retirement - younger baby boomers, gen-x, echo generations - Typically, those people who are around 35 and older at that point. Unfortunately, the baby boomers significantly outnumber the younger generations, so the supply of stocks and bonds will exceed the demand, and the value will drop. The first ones out will be OK, but then there will be a stock market crash. The US will be slightly before Canada. The only way for this to be avoided is to sell the stocks overseas, but since the US is traditionally protectionist, they will resist selling US companies willy-nilly to foreign owners, probably though some form of legislation. I think it would take until about 2018 before it really gets critical, but that's a guess. Some thorough analysis would certainly improve these guesses.

These two unrelated issues will be occuring at close to the same time, and will cause the North American economy to get seriously shaken. The ramifications of this shaking is a matter of debate, but it can't be good.

Me, I'd invest in land, not gold, but thats a personal choice.

[ 26 March 2004: Message edited by: dnuttall ]


From: Kanata | Registered: Mar 2004  |  IP: Logged
dnuttall
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posted 26 March 2004 05:11 PM      Profile for dnuttall     Send New Private Message      Edit/Delete Post  Reply With Quote 
Oliver Cromwell:
quote:
The key factor is the growth rate of technical progress.

How the hell is that measured? I've tried to work it out, but I don't get anywhere. Granted, my background is engineering, not economics. But I don't see what it actually measures.


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Stephen Gordon
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posted 26 March 2004 05:47 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
In the short run, where the capital stock is more or less fixed, output per worker (or per man hour, if that data is available) is a rough-and-ready measure.

In the longer term, the 'Solow residual' or 'Total Factor Productivity' measures how much of the observed growth in output cannot be ascribed to accumulations of inputs (notably capital and labour).


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DrConway
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posted 26 March 2004 08:39 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by dnuttall:
Dr.C: I'd love to hear your thoughts as to why the difference between interest and inflation has been pretty static at 3%-4% for the last 40+ years.

Actually, real rates have risen since the 1970s. Used to be the differential was about 1-2 percentage points, but it's gone up to between 4 and 6 points.

A windfall to the rentiers and a screwing en masse for the workers.

quote:
As spake by Oliver Cromwell:
In the longer term, the 'Solow residual' or 'Total Factor Productivity' measures how much of the observed growth in output cannot be ascribed to accumulations of inputs (notably capital and labour).

Request for clarifcation:

It's not clear to me how Total Factor Productivity does this, since it is, as I understand, a ratio of output to input and so changes in this can measure the economic efficiency of production but not the composition of the changes in productive efficiency.

[ 26 March 2004: Message edited by: DrConway ]


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Stephen Gordon
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posted 26 March 2004 08:41 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
Which interest rate are you using?
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DrConway
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posted 26 March 2004 08:47 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Let's see, I'm basically stealing this from the data in Paper Boom, Figure 9-1 on page 192, which plots real interest rates over time, both short-term and long-term. He says he did the math from StatsCan's National Income and Financial Accounts.

I suspect he used the Bank Rate set by the BoC, so the real rates referred to are either based on that or on the long and short government bond rates.

Anyway, I'll scan the page if you really really really are interested, but the basic outline is clear:

Short-term rates went from an average (as indicated) of about 0.5% to about 6% after 1980, and long-term rates from about 2% to 7% after 1980.

If you dispute the source, I invite you to go to the original StatsCan data and work it out for yourself.


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Stephen Gordon
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posted 26 March 2004 08:51 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
I didn't mean to sound snippy; I just wanted to know. There are a lot of interest rates, and the differentials change over time.
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Michelle
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posted 28 March 2004 11:06 PM      Profile for Michelle   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
I'm also moving this to labour and consumption.
From: I've got a fever, and the only prescription is more cowbell. | Registered: May 2001  |  IP: Logged

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