Who owns the money?

[maffu]

Many continue to laugh at low percentage fixed returns, depositors etc. I wondered why so many supply money at such low returns if everyone knows property and share returns are better. It's just interesting that all these debts have been supplied by people which must be thinking that their returns will be better that way.

China, Arabs and perhaps fixed term Super funds everywhere. OK...... all appear content with lowish returns.

Long post ahead...

I know I will explain this in a terrible way (it is something I only just learnt about from a portfolio manager), but the largest portion of investment return is determined by the risk free rate. Over a full market cycle the cash rate averages around 5-6%. Over a full cycle the share/property will only be about 8-11% rough figures. The cash rate is the driving force behind the majority of investment returns, so its not a low rate to be laughed at.

In terms of saying China, Arabs and fixed income super funds appear content with lowish returns, this is not as simple as it seems.
Traditionally, these investors all invested massive amounts(trillions) in US treasury bonds. However in the last few years US interest rates were so low at about 1% that these massive investors wanted something better than inflation.
Trillions of dollars that were not happy with the crappy 1% US Treasury bond return which has an investment rating of AAA, went looking elsewhere, at about the same time the CDO market started growing. As Mortgage Backed Securities were considered "As safe as houses" they were given an investment rating of AAA.
So these trillions of dollars could invest in AAA rated government bonds returning 1%, or AAA rated mortgage backed securities rated AAA that had much higher returns.
As the amount of liquid capital was so immense, there simply were not enough good housing loans that could be made to fund the demand of investors wanting this safe product with high returns.
The investors wanted more, more, more...
So at every level of the economy, there was a massive incentive to give progressively worse and worse loans. At the end of the day, the investment bankers, banks, mortgage brokers, and home buyers all needed to try and fill this demand by the investors. So homeless drug addicts were given housing loans of hundreds of thousands of $$$.
So it was the demand of the investors wanting a higher return that kind of helped get us into the sub prime mortgage crisis.

 

[MR.]

Kez180, Maffu, with thanks.

AAA for housing mortgages, it would be only looking for trouble. Their argument no doubt was that property over the longer term can only go up or remain the same as the population grows. Partly the depositors fault? Perhaps, perhaps not... If the housing mortgages were as safe as gov' bonds with both rating AAA. You don't need the AAA to know they're not. Even had the difference in interest to support this claim.

 

[doctorj]

You don't need the AAA to know they're not. Even had the difference in interest to support this claim.

I suspect the argument underpinning the high ratings (investment grade) was largely a mathematical one. Mortgages were packaged across different geographic markets (eg Florida and LA) and then often structured in different tranches. The investment grade portions came about because losses were modelled based on a period of relatively low defaults and cheap credit, the idea that the geographic spread reduced risk concentrations (and therefore reducing probable losses) and that the other tranches would take the losses first. Mathematically, the investment grade tranches were almost riskless - unfortunately the modelling proved deficient and the rest is, as they say, history.

 

[GumbyLearner]

buy some physical gold.

Have to agree with Disarray!

Just be wise with what you buy.

 

[ivant]

If you want to know how the money gets to the banks, it comes from Gov't printing money along with them borrowing from international banks. In Australia most banks actually dont provide that high of a percentage of loans, more act as an intermediate party. they will buy from overseas, and sell here at a higher interest.

what was said earlier about money circulation has been around for ages. Money in paper form originated when people got fed up with carrying gold around. banks started giving out certificates for gold in their reserves. what happened later is people started trading the certificates and eventually banks started selling certificates, thus creating loans. the amount of money that circulates as a result is much more than we have printed over our lifetimes. this causes inflation to stay down.

then we see credit crunches

 

[Conza88]

Fractional Reserve Banking by Murray N. Rothbard

Now having read that... consider yourself smarter than most clowns with PHD's in economics. (Not in the Austrian School)

www.mises.org (Media Section) and (Literature)

 

[Aussiejeff]

Geez. It's simple really.

The banks own the money.
The banks make the money.
The banks take the money.
The banks fake the money.

The banks pwn the economies.
The banks pwn the countries.
The banks pwn the world.
The banks pwn us.

Can't see what all the fuss is about.

 

[Kez180]

Fractional Reserve Banking by Murray N. Rothbard

Now having read that... consider yourself smarter than most clowns with PHD's in economics. (Not in the Austrian School)

www.mises.org (Media Section) and (Literature)

The views expressed in that article are one sided and badly researched...

It somewhat reeks of zeitgeist...

 

[Conza88]

The views expressed in that article are one sided and badly researched...

It somewhat reeks of zeitgeist...

Zeitgeist is a piece of trash filled with fallacies / half truths. (Addendum is anyway)

But you are right, that article was a snippet / summary essentially.

The same writer outlines FRB in several books below. Which can also be heard - free audiobook's.

What Has Government Done to Our Money?
The Mystery of Banking
The Case Against the Fed
America's Great Depression



The Federal Reserve as a Cartelization Device

A Critical Analysis of Central Banks and Fractional-Reserve Free Banking

Money, Bank Credit, and Economic Cycles by De Soto

 

[MR.]

Zeitgeist is a piece of trash filled with fallacies / half truths. (Addendum is anyway)

Watched it last night. Now I know what people are talking about when it comes to the US blowing up their own towers. Right..... Don't want to talk about the video but for starters the windows blowing out below the collaspe would have been air pressure. The horizontal floor trusses of the towers keep the verticle beams from buckling. Take out the trusses with extreme heat and with the above weight of the floors and beams buckled and down she came. Sounds more lodgical to me.

The views expressed in that article are one sided and badly researched...

It somewhat reeks of zeitgeist...

Though the Last paragraph I have not overlooked completely:

Let us suppose that total insured bank deposits are $1,600 billion. Technically, in the case of a run on the banks, the Fed could exercise emergency powers and print $1,600 billion in cash to give to the FDIC to pay off the bank depositors. The problem is that, emboldened at this massive bailout, the depositors would promptly redeposit the new $1,600 billion into the banks, increasing the total bank reserves by $1,600 billion, thus permitting an immediate expansion of the money supply by the banks by tenfold, increasing the total stock of bank money by $16 trillion. Runaway inflation and total destruction of the currency would quickly follow.

So what do the governments do? Secure bank deposits with the governments backing. Controlling a run on the banks. The government appears to have had little choice. They had to follow other countries otherwise there would have been a run on the Australian Banks. If foreign money keeps pulling out of Australia the reserve would have little choice but to introduce more money. No one really wants the reserve to prop up these loans but what else should be done? Liquidation?

If you had money why do you keep it? Surely it’s to buy something with eventually. That’s why I hold some money. That’s why Mr Burns has a million dollar problem! Could it not be the intention of these foreign lenders to want to spend their money at some stage as well? Like when valuations make them too compelling not to take advantage of the opportunities back home or wherever? Retrieving their money from debtors potentially only speeds up the potential of buying opportunities? Now I’m starting to sound like Zeitgeist.
Note in the last sentence of the quote above.

Runaway inflation and total destruction of the currency would quickly follow.

Quickly follow! Only if people wanted to take on more debt! Interest rates drop to encourage spending. But Japan couldn’t get it’s people to spend! Even with their lack of space their property values kept devaluing.

Have now read through the thread “Hypothetical the economy goes bust” https://www.aussiestockforums.com/forums/showthread.php?t=7108
as pointed out by Nomore4’s and has recently got a deserving “bump” A stand out poster has been Lakmac and the research he has done over the years shows. However his later observations I do not understand.

Lakmac 21/4/09
I am getting ready for a period of high, if not hyper inflation. Get out of cash get into hard assets - commodities, real estate, mining companies. China is doing this right now. The days are numbered for the US dollar. The only reason it is holding up is there is no ready alternative for a world currency. Change that and the US dollar becomes about as valuable as a peso.

We are heading into inflation - not if, when. I give it till the end of the year when we see the signs of inflation hitting.

China has a tonne of US dollars which if they converted will unpeg their currency from the US, makes China’s currency rise which in turn makes China less competitive in exports. They buy metals by the likes of Copper because it’s priced in US dollars and they have USD. (China doesn’t want US dollars anymore) Yes, the days appear numbered for the US dollar.

I have asked Lakmac to comment here on this post as I didn’t want to perhaps spoil a good thread over there.

Interest rates rise because of the “lack” of money as what appears to be beginning now. Remember it’s not the interest rates it’s the money supply. RBA has no control over rising interest rates unless they start printing excessive amounts of the stuff. Food goes up and basic living items because the loans which produce these products and get them to our tables, have risen. What about the other items? The items we don’t really need! They try putting them up but no one is buying them. So they continue to drop in price just to get a sale.

Meanwhile contractors and manufacturers are lowering their quotes and the average persons wage can now drop. I am still having trouble seeing how inflation comes into the equation without more leverage by the public.

Now is the time to get out of cash?

Is it? I keep thinking it’s not. Can you see where I’m coming from? We / I don’t need US dollars, I need AUD even if it falls further in value. I get into real estate as you suggest. The properties both sides are reduced in value because of the “lack” of cash causing foreclosures etc. Your/my new property is now valued as per next door. We just lost money although our property might have been fully owned.

I‘m saying “Now is too early.........”
I would like to be convinced that I'm wrong before I am..... ie: this discussion.

As per Stormin Normin’s post on Cash is King, although typical perhaps of a currency trader

“what currency”

. Who owns the money? as per thread title. These countries who own the money might just do better than the USD AUD POUND etc. So could the likes of the Yuan do a lot better than USD and perhaps the AUD? Won’t stay pegged forever..... exchange back later to AUD.....