The word that you will start to hear more and more over the coming year is Deflation. Bank failures will turn up over the coming year. Even with the FDIC, check the strength of your bank. Go to thestreet.com to do this. See how well capitalized they are, and where they have invested your money. How likely are they to be able to liquidate should they need. You will be surprised. The strongest banks you are likely to find will be smaller banks in rural areas. If your bank is weak (and it probably is) move your money to one of the top two banks in your state. Truthfully, I would say keep as little as you can in a checking account to manage bills. If possible, keep a decent amount within safe reach. I nice big, heavy gun safe is a good idea.
Deflation? I am graduating soon with my economics degree and i’m just interested in how you’ve come to this conclusion. Especially considering this idea that inflation is bound to hit when bank lending picks up. I can see relatively little inflation, considering once inflation picks up the fed might sell treasuries to counter too much inflation. Then again I dont really know how markets truly work, so please fill me in.[/quote]
The following is a repost, but it contains basic building blocks necessary for further explanations
"The monetary base is coin, paper and commercial banks’ reserves with the central bank.
Money supply is the total amount of money available in an economy at a particular time. It includes all of the monetary base plus all of the additional money created through credit via the process of fractional lending.
The money multiplier measures the amount the money supply increases above and beyond the monetary base.
Therefore, if deposits are up and the coin and paper remain constant, then commercial reserves would be increased (but only reserves, which remember are only a fraction of the total money supply).
Now, if deposits are up but the money multiplier is the same, then you DO NOT have more money being lent. Actually, it would appear that less money is being lent. You simply have larger reserves on hand.
Expansion of money supply is primarily accomplished through the issuance of credit/loans through the process of fractional lending. That is the purpose of the money multiplier, to determine the amount of money that has been created through fractional lending, above and beyond the monetary base.
If the money multiplier is decreasing then it means that existing loans/credit is being retired at a greater rate than new loans/credit is being created. The money supply is shrinking. (Deflation)
Central banks mandate reserve requirements, the fraction of demand deposits that have to be kept on hand for the purpose of redemptions. In this way they can limit or control the amount of money creation. They also insure that the banks have enough cash on hand to cover normal withdrawals.
So what happens if a “black swan” event occurs and an abnormally large amount a people show up at once to redeem cash? This is a bank run or systemic crisis, such as happened in the GD. The central bank has devised methods to divert such events. They regulate banks, insure deposits, and act as a lender of last resort.
This seems to have worked just fine for the last eighty odd years. Then again, we have not experienced economic conditions and the gross negligence of that period, at least until now.
The public is for the moment pacified by the belief that if something were to happen at their bank that they are insured by the government and therefore have no risk of loss. They forget that they are the government, and also that the funds that are set aside to cover such loses are finite. Again, the system is set up to handle normal events and failures just as fractional lending is set up to handle normal rates of withdrawals with a added protection factor figured in. Black Swans are not accounted for.
Finally, I think part of the confusion lies in fully understanding money creation. When a loan is made, the borrower receives the funds for the intended use. Money supply is increased. However, the monetary base is not. That is the reason a multiplier is needed in the first place. It is not as if a call goes up to the Federal Reserve, they call the Treasury Dept., and the printing presses are started up. An amount of paper currency equaling the loan is not created and then shipped to the originating bank. Remember, it is fractional lending.
Now, before I start getting pounded, yes there are mechanisms in place by which additional currency can be created and put into circulation. However, it is relatively rare and not anywhere on the scale of which would be required to offset deflationary pressures if and when they occur. If they did do so, it would take a matter of time just to offset the real difference between the monetary base and the money supply. In the beginning they would simply be replacing credits on an electronic ledger with real bills."
The above was posted in response to a statement about the money multiplier and its importance. Not relevant here, but it puts it in context.
Again, I am not a professional. I do not have a degree in economics. I do have an MBA, for what it is worth (very little). I often feel like the character in “Good Will Hunting” in that I have learned much more in life with a library card and internet access than I have in years of school.
Also, you state that that inflation will hit “when bank lending picks up.” We have had well over a year of intense efforts by the government to inflate the economy and get banks to lend. We have had a very good ten months in the markets in anticipation of this. However, actual lending has barely increased. I believe that going forward we will see even less.
Put it all in perspective, however. I am not saying that deflation is permanent. I do think that the next year to two will be very interesting.
I will be glad to answer any specific questions you have. Post away.