Looking at the 17th Century private goldsmith bankers, the reserves that those bankers were holding were gold reserves and they were issuing banknotes based upon those reserves. I do agree we have a somewhat parallel situation today, but it is not the counterfeiting of US Treasuries. It is not exactly parallel though. The old goldsmith bankers were prone to issue more banknotes than they had gold on hand to redeem them (Actually, contemporaneous accounts show that is precisely what happened in the US banking system in the 1930's too, "The Bubble That Broke The World" being only one example). The Fed has played a slighly different game today. Under our banking system now, US Treasuries are held as reserves and are the equivalent to what gold was in the 1930's and under the old goldsmith banking system. As recently as 2 years ago, the Fed had US Treasuries on hand as assets and had issued an equal value of Federal Reserve Notes as liabilities. But, instead of increasing the Federal Reserve Notes outstanding, they did something different. They loaned out the US Treasuries and took in lesser quality debt. If you are holding Federal Reserve Notes, the parallel there would be that you may be holding the equivalent of an old goldsmith banknote.malleni wrote:Higgenbotham
I think that you are quite near the final answer.
Agreed also that it is shockingly that US government did nothing against this widespread fraud in Treasuries, but also "imaginary" stocks and gold derivates too.
And it is obviously deflationary... but Debt (credit) deflationary.
Somebody here (John perhaps) put a very good link from Wikipedia about history of money (and deflation too) and it explains quite much.
Here it is again:
http://en.wikipedia.org/wiki/History_of ... th_bankers
Obviously - deflation can happen in all sort of assets, but since credit is not direct an asset (just "looks" as one) deflation in credit has other implications.
The situation with US Treasuries is a bit different. Let's say the old goldsmith bankers had taken gold bars and hollowed them out, replacing the core with tungsten (tungsten has the same density as gold), then introduced those bars with tungsten cores into the marketplace. That is the situation we have today with US Treasuries. Going back to the goldsmith banking days, gold was still banking reserves in that system despite any counterfeiting that occurred, but you sure don't want to purchase a gold bar with a tungsten core unless you have a plan to get rid of it. So what you would probably do is go to the source like a gold refiner and purchase one there, and you might not necessarily want to hold goldsmith banknotes, although it might be OK if your goldsmith could distinguish between counterfeit and real gold bars. If counterfeiting of gold bars became widespread and generally acknowledged, then the secondary market for gold bars would essentially shut down. But as long as there was still a primary source for non counterfeit gold bars, the marketplace and monetary system could still function.
In today's market, we still know where to get good US Treasuries, but there is a further problem, that being that the value of US Treasuries are not uniform because default risk is a moving target. Meanwhile, all US Treasuries are counted as Central Bank reserves regardess of duration. As mentioned on the forum here, the value of US Treasuries is based upon the ability of the US government to tax and collect revenue to support the debt. One thing we do know. If default risk becomes a problem, the longer duration treasuries will lose value first, short term treasuries will stay near zero percent interest, the yield curve will steepen, and the economy will begin to shut down. That's what I believe will start to happen in the second half of this year. Despite talk of recovery, you don't see short term treasury bill interest rates moving any higher. Also, if the dollar system itself begins to suddenly collapse, nobody will want treasuries of any duration and interest rates across the curve will probably equalize while the price of gold skyrockets. It seems likely to me that the bond market will exert its discipline before the clowns at the Fed and Treasury are able to destroy the entire financial system. There isn't any guarantee of that though.