Teetering on the edge of insolvency

Mogambo writes: I look at Required Reserves, $41.64 billion, and divide that by Savings/other Deposits of $4084.8 billion. And what happens when you do that? Well, if you are like me, and you have my powerful skills with calculators, then you get some weird series of answers because you did something wrong with all those confusing buttons and then, in desperation, you finally ask someone who is just walking by to please use come over here and figure this damn thing out for me, then we get the surprising answer of 0.01.

This means that for every dollar of deposits , they actually have only one cent of reserves in case people come looking for their money. Okay. Now, taking a look at Total Assets of the US banking system, we find roughly $4,381 billion. And when we compare that to the reserves of $41 billion, it is, likewise, one puny cent of reserves against a dollar’s worth of some of those loans going bad. So that one cent in reserves, that one measly penny, is backing up both a growing contingency of souring loans going bad, AND people wanting their money!

As Mogambo points out, every textbook talks about 10 percent reserves. The Bush administration is working feverishly to stimulate the economy – ala Keynes – with the desperate participation of the Federal Reserve, and they have managed to reinflate the Bubble. But if you thought 2000 to 2002 was bad, just wait for the payback on this mini-boom. I was wrong about a decline this spring, mostly because I didn’t dream that the powers-that-be would be so stupid as to go into inflation mode in order to try something that never ever works except in the short term. I know, I know, never underestimate the potential for human idiocy. I should have known better, especially when the Fed started talking about deflation and printing presses.

This does have the potential to get ugly. I’ve been assuming all along that the destruction of the dollar is part of some plan to move the USA to a global currency, maybe even a gold-backed one, but I’m starting to think that for once the incompetence theorists may be right.

“Paper money eventually goes down to its intrinsic value – zero.”

– Voltaire, 1729