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More Than a Helping Hand
James Turk,
www.goldmoney.com 07/29/08
One of
the basic functions of a central bank
is to act as the 'lender of last
resort'. This facility is used to keep
banks liquid during a period of
distress.
For
example, if a bank is experiencing a
run on deposits, it will borrow from
the central bank instead of trying to
liquidate some of its assets to raise
the cash it needs to meet its
obligations. In other words, the
central bank offers a 'helping hand'
by providing liquidity to the bank in
need.
The
following chart is from the Economic
Research Department of the St. Louis
Federal Reserve Bank. Here is the
link:
http://research.stlouisfed.org/fred2/series/BORROW.
This long-term chart illustrates the
amount of money banks have borrowed
from the Federal Reserve from 1910 to
the present.
This
chart proves there is truth to the
adage that a picture is worth a
thousand words. It's one thing to say
that the present financial crisis is
unprecedented, but it is something all
together different to provide a
picture putting real meaning to the
word 'unprecedented'.
It is
an understatement to say that the U.S.
banking system is in uncharted
territory. The Federal Reserve is
providing more than just a 'helping
hand'.
This
chart should alert everyone to the
perils of putting your wealth on
deposit in a bank. The magnitude of
the borrowing by banks shown on this
chart is signaling that the banking
system is suffering from more than a
lack of liquidity. The real question
we need to be asking ourselves is
whether the banking system is solvent,
i.e., whether the assets of banks in
the aggregate have greater value than
the banking system's liabilities.
I
distinguish 'liquidity' from
'solvency' in an article I wrote last
year for my monthly column on
Kitco.com. Here's the link:
http://www.kitco.com/ind/Turk/turk_nov122007.html.
In this article I quote Ludwig von
Mises as follows: "Finally the
masses wake up. They become suddenly
aware of the fact that inflation is a
deliberate policy and will go on
endlessly. The crack-up boom appears.
Everybody is anxious to swap his money
against 'real' goods, no matter
whether he needs them or not, no
matter how much money he has to pay
for them."
The
above chart indicates to me that we
are on the cusp of a crack-up boom.
Owning gold and silver and avoiding
the dollar are now more important than
ever.
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