GoldMoney Alert - 29 July 2008

More Than a Helping Hand

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.

Published by GoldMoney
Copyright © 2008. All rights reserved.
Edited by James Turk

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