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What’s the meaning of Economic “Confidence”?

13 Feb

Losing Confidence [courtesy Google Images]

Losing Confidence
[courtesy Google Images]

In the January newsletter from Elliott Management, Paul Singer wrote in part.

 

 “If investors lose confidence in paper money, as evidenced by either a hard sell-off in one of the major currencies or a sharp fall in bond prices, the Fed and other major central bankers will be in a pickle.  If they stop QE and/or raise short-term rates to deal with the loss of confidence, it could throw global markets into a tailspin and the worldwide economy into a severe new recession.  However, if they try to deal with the loss of confidence by stepping up QE or keeping interest rates at zero, there could be an explosion in commodity and other asset prices and a sharp acceleration in inflation.”

“Loss of confidence.”  “Loss of confidence.”  “Loss of confidence.”

A “loss of confidence” seems to be an important subject, but what’s it mean?

Primarily, in modern economics, a “loss of confidence” means a loss of the willingness to borrow.

It may also mean an unwillingness to lend.

But mostly, the loss of confidence in the economy means a loss of confidence in one’s ability to repay debts.

Thus, a “loss of confidence” means a loss of the willingness to borrow currency and go into debt.  Given that we use a debt-based monetary system in a fractional reserve banking system, a refusal or unwillingness to go into debt is arguably anti-social and, if sufficiently widespread, poses a threat  to the entire financial system.

I.e., if I borrow $250,000 for a home, I actually create a new $250,000 in credit with my signature and promise to repay the alleged debt.  By borrowing I create capital needed to fund our economy.

If I borrow $250,000, the banks can then use my $250,000 promise-to-repay/note as collateral  (an “asset”).   Under fractional reserve banking, the bank can use my note to justify lending up to ten times the note’s face value.   My $250,000 note can justify the bank’s lending up to $2.5 million to other consumers/debtors.

Thus, my mere signature on a $250,000 note might be sufficient to create a total of $2.75 million in new credit to stimulate the economy.  However, if I lose confidence in the economy  and don’t believe that I’ll be able to repay that $250,000 loan, I will refuse to borrow the $250,000, and the economy might suffer a $2.75 million dollar loss of potential “stimulation”.

You can see how important a public “loss of confidence” can be.  If enough people lose confidence and therefore refuse to borrow (and thereby go deeper into debt), the debt-based financial system could collapse.  If enough new funds aren’t created by going further into debt, the pre-existing debts might not be paid and the Ponzi scheme might collapse.

In the event of a serious loss of public confidence, we could expect the government and/or the Federal Reserve to use their powers to create a comparable sum of fiat currency to inject into the economy.  The purpose would presumably be to compensate for and supplant the loss of “stimulation” caused by people who lost confidence in the economy, and therefore refused to borrow more currency.

Under such circumstances, the Federal Reserve and/or national government might describe their creation of fiat currency as “Quantitative Easing”—which is exactly what we’ve in the aftermath of the onset of the Great Recession in A.D. 2007-2008.  The public lost confidence in the economy and stopped borrowing.  The government/Federal Reserve tried to replace that lost borrowing by injecting QE into the economy and lowering interest rates to make borrowing irresistible.

But even with lots of additional cash to be loaned and low interest rates, the majority of the public still could not be persuaded to borrow, go deeper into debt, and thereby stimulate the economy.  QE and low interest rates have done enough to slow further economic decline, but they haven’t yet caused enough “stimulation” to precipitate a recovery.

Point:  A “Loss of confidence” means a public refusal to borrow and go deeper into debt.   A debt-based monetary system can’t survive a widespread refusal to borrow.

 
11 Comments

Posted by on February 13, 2014 in Banking, Debt, Fascism, Money

 

Tags: , ,

11 responses to “What’s the meaning of Economic “Confidence”?

  1. thomas russo

    February 13, 2014 at 11:02 PM

    A bubble is something that will burst and I am going to burst this one, there is and never was any money it is an invention and always has been and there is case law on it. Ever play MONOPOLY?, well the bank deals out the money and at the end one has all the money; and guess what? the bubble is burst, why because no one else has any and everyone is broke, including the one that won, for no one can play anymore, unless the one that one gives it out for that winner is a looser also, get the picture? All, I repeat ALL the players are no longer players and that is the bubble.

     
  2. Applessence

    February 13, 2014 at 11:59 PM

    Nice job on the explanation Alfred! : )

     
  3. fawnmeadowsmc

    February 14, 2014 at 12:56 AM

    OMG, I need your help!!!!! We have an attorney addressing a Con-Con, Petition. Yes it’s true!!!! We have people making statements as addressing a democracy on this petition too. They have No idea what the hell their doing. Yep, its true. Better get the shovel ready, cause we won’t have freedom anymore! Republic vs democracy, people’s rights vs citizens’ rights. Yep, shit has hit the fan! :-( When all we have to do is address a Presentment to our Governors. As Notice of Dishonor, regarding Treason. I can see it now, Hitler here he comes! A con-con under secrecy.

     
    • Adask

      February 14, 2014 at 4:18 AM

      whose help are your requesting?

       
      • J.M.

        February 15, 2014 at 5:13 PM

        @ whose help are your requesting?
        Apparently nobody’s help here on this blog is being sought.This is the first time I know of that there is no response to you. Maybe your question is to hard to understand.

         
    • Mike

      February 14, 2014 at 4:47 PM

      Wait…what?

       
      • J.M.

        February 17, 2014 at 6:55 AM

        Mike,
        February 14, 2014 at 4:47 PM
        @ ?Wait…what?

        Huh?

         
  4. Yartap

    February 14, 2014 at 12:44 PM

    No borrowing or loans to create money = no money or currency to circulate = DEPRESSION!

     
    • J.M.

      February 17, 2014 at 7:03 AM

      Hi Yartap,
      Since you are not corresponding with me on the MOOA Elc.Thread, maybe you will on this one.
      I have been told that it “costs” the same thing to print a hundred dollar bill as one dollar bill. How is either one “paid” for? Where are the “funds” derived from? OR. what is the source that provides the money(<?) to pay the printing costs of the hundred & one dollar BILL ? Thanks.

       
      • Yartap

        February 18, 2014 at 6:02 PM

        Greetings Jim,

        The quick answer is the Federal Reserve uses a portion ($550 million cost) of their income from counterfeiting and loaning at interest to pay the US government printing of Federal Reserve Notes.

         
  5. Peter

    February 17, 2014 at 11:03 AM

    ZIRP and QE to infinity has aided the G.D.P. (general dumb public) to continue in their mindless acquisition of things of little or if any,lasting worth. Things that give comfort and aid to help them deal with the anxiety they suffer from. The G.D.P. is bombarded incessantly with spell casting(propaganda) and little chance of ever getting grounded in sound economic truth to ever make sound economic decisions, thus, they continue to borrow just to survive in the usury maze of deception and fraud. The maestros seem to be exerting more economic pain to possibly keep the G.D.P. borrowing just to survive.

    The bond (BORROW) market bubble has been pricked, this has to be managed at all costs. I suspect the Dow Jones Industrial Average and all of the indexes in general are going to be sacrificed (dropped) in order to create a ” flight to safety” into bonds in a desperate act to stand against the stampede out of bonds underway currently.

    ZIRP and QE to infinity is causing the stampede into G and S by the smart money waking up to desperate currency debasement going on worldwide.

    A front row seat to this event is good to watch from at a distance safely on the “silver summit”.

    Friday was a key day for silver as it broke out above $20.48, it is my firm belief the downtrend is officially over. Going forward, a new uptrend has begun and as it unfolds there exists a real possibility there is going to be severe supply shortage in physical. It is possible that in the mania that will unfold in this leg up it may be similar to what transpired during the DOT-COM bubble. Anything with a DOT-COM attached to a company name when over the moon. The temptation to play in the commercial sandbox is hard to resist at this juncture in the silver market, mining stocks with the name silver attached to it may prove to do the same thing that took place in the DOT-COM boom. Just a speculation of course, some of these issues are down over 90%, and due for a substantial retracement rally off the lows.

    Question: with ZIRP in place, this gives opportunity to borrow at 0% and carry the cash to invest in a vehicle that provides a positive rate of return, was this the cause global equity markets rally since 2008?

    Me, a simply man with my feet on the soil trying to learn economic survival from Al and all that gather here at this blog destination. Forgive me if some of my points are hard to understand, my motive is genuine and I try to participate in this forum to better myself and to help others in this economic madness.

     

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