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LIBOR revisited



October 12, 2008 – Comments (2)

Looks like G7 is starting to do what needs to be done.  They announced a bank intra lending guarantee plan.  Not a blanket guarantee, but at least one that might help push down libor, and get the money flowing again.  This is good news IMO.  Will it be enough?  I certainly can't say but this and other programs might be enough to put the brakes on a financial collapse.

2 Comments – Post Your Own

#1) On October 15, 2008 at 8:28 AM, dexion10 (27.03) wrote:

awalljr: Thanks for your comments on my blog.


I wanted to get back to you regarding this comment:

"The thesis is to keep credit available to BUSINESSES which in turn will keep people working.  Yes people will change their spending habits out of neccesity.  Yes people will, hopefully, start paying off debt and increase savings.  Yes this will impact some companies more than others.  But it is imperative to minimize unemployment."

My point is that this is a flawed thesis. I didn't spell it out as well as I should have in my late night post BUT here goes.

The money supply is shrinking. It is impossible for the banking system to stay solvent while the money supply shrinks... that is a mathematical impossibility. 

You can actually express this with a simple equation 

P+I > P

(P) principle
(I) interest

Banks create most the money in the world by issuing loans - the principle (P) - that support the growth of commerce. In return banks require repayment of P+I - but  I (interest)  is not created by the banks. Interest (I).

While some incorrectly maintain that capitalists create value and that value is returned to the banks as P+I. Instead the simple truth is you can't re-pay a loan with "value" - you can only repay a loan with "money".

This leaves only one possible conclusion - it is ultimately the growth in the money supply (not capitalism / "value" creation) that keeps commerce going -  increased "value" can only be recognized (confirmed) by increasing the money supply.... value creation is in the "minds eye" - but we can only confirm value-creation by tendering money to recognize that value-creation.
Interest money is created by inflation (i) and the government issued money (G) entering circulation.  As a result interest can only be paid with the passage of time and the inflation of assets.

So we can't just issue the same amount of loans (money) that we did in 2007 and go on our merry way.... we must create more money.

Worse the government must do the heavy lifting because the banks have less people to lend to in a world that won't accept the same leverage.

If the government must create the money it won't be pretty like when banks do it... banks can mystify their creation  through the fractional banking system - by issuing loans that nobody thinks of as "new money".

The government would prefer to give 1 dollar to a bank and let the banking system re-lend that dollar 5-10x.  Unfortunately given the fact that we took leveraged lending to the extreme the government may actually have to create 5-10x the dollars we're used to seeing them do.

This will be an obvious devaluing of the dollar - vs. the mystified devaluing that fractional banking allows for.... so there will be inflation.


The problem can not be fixed by the small dollar amounts that the government is talking about.  We need a multi-trillion dollar bailout.





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#2) On October 17, 2008 at 8:45 PM, awallejr (35.95) wrote:

From my understanding they are doing what you suggest, they have expanded the money supply tremendously.  In time they can start to pull it back in order to deal with the inevitable weakening of the dollar and inflation.

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