Let's Just Say It: Print More Money 65 comments
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It is clear now that fiscal stimulus has not engendered a V-recovery and deflation is here in spades as money velocity and quantity plummet. Bankruptcies, defaults, and deleveraging are destroying money at an historic pace, perhaps as much as $12 trillion USD in the past 18 months, crashing prices for houses, oil, flat panel televisions, and falloff in purchases of labor, food, and clothing. Price cuts for non-commodities have been moderated as corporate managers cling to what little pricing power they have since they're unwilling to crash their wages. As our economy unwinds, we stare out the back window wondering what we can grow for food, and wonder what happened to Ben Bernanke's helicopter
When excess capacity is pandemic, and when half the planet is still living in near poverty- why isn't economy activity booming? Well, it was, but then the Fed increased interest rates 18 times. 18, stealing cash for debt service and profit coverage, like reducing the oxygen in a room full of students building a human pyramid- and when a couple of them faltered, the whole thing started coming down.
So what's the solution that will rebuild the pyramid - just tell them to get up? No. Prop a couple of them up? No. The answer should be obvious: more oxygen, in concentrated form, the sooner the better - and a promise not to cut it off again.
So, where's the money? Where's the quantitative easing? Not token hundreds of billions. Trillions. Dollars. Without sterilization. The kind of money that will create - no, force - inflation. Unfortunately, there are still too many inflation hawks and scarcity paradigm acolytes in the mix, the chicken littles of our day.
It is clear this generational crisis needs serious action. Not so much to preserve the supply and demand that are being destroyed- those can be rebuilt fairly quickly, if demand returns. Rather, the rules of capitalism- rewarding risk and competition with reward- have been broken, and if not fixed the confidence and desire to play the game will be greatly diminished. And given the massive increase in global living standards the past 30 years, this would be a bad thing for human progress.
So, print money. It's an economic tool actually bestowed by the Constitution to Congress (who's outsourced it to the Fed). Buy Treasuries and oil with newly minted dollars. Sure, the price of imported commodities will skyrocket. Exchange rates will shift (though many countries are in our same boat). Long term interest rates will increase. But aren't these all necessary? When an hour of labor in the US costs many times what it costs in the developing world, shouldn't there be a shift? And when we're drowning in debt, who needs more?
Hyperinflation, you say? The US is not Zimbabwe - we have way more productive capacity and supply potential. So oil goes back to $120 and gas $4/gallon - we can telecommute while we build out solar and the smart grid. Food climbs - the government can stop paying farmers to not grow crops. Travel to China- the Olympics were last year. Meanwhile, shifting exchange rates help exporters and employment grows. Real labor prices and home prices recover, toxic assets become less toxic, and consumers start buying again- reviving the tattered export economies of China and Japan to offset devaluation of their dollars - and they start to take advantage of the affordability of a vacation in the USA.
As prices and utilization rise, payback on investment in new capacity improves, and economies of scale, technological substitution, competition, and specialization mitigate price increases. And investors see that inflation will rob them of deals, and come off the sidelines to invest in productive ventures sooner rather than later.
And then, Congress must act to keep Fed fund rates low - for a long time. The next time GDP approaches 4%, tell anyone who uses the word "overheated" to take their Philips curve and go home and plant their garden. Encourage global development, alternative energy development, cyberspace development, to alleviate your commutes, our sickness, and our ignorance.
Once money and velocity recover, what will happen to stock prices? They'll go up, along with all other assets, in dollar terms. What will be the big winners? Probably oil, although alternative solutions will eventually force much of it to rot in the ground. Probably gold, although productive assets that once can have confidence in without an assay or forensic accountant should increase in value more. Probably copper, although aluminum wires and wireless could create a major shift in consumption. Emcore (EMKR) is positioned as the arms dealer in the solar wars, Boeing (BA) the arms dealer in the travel wars, and Microsoft (MSFT) the arms dealer in the cyberspace wars - and is there a more optimistic view of the future than clean energy powering both real and virtual exploration?
Without having to pick the winners, if the government (and European Central Banks in the same predicament) just fuels the economy with enough money, equilibrium can be reached by the market without massive government intervention, and further damage to the rules of the game. And once we recover, more and more people are poised to enter the game, which is good for everyone.
So, Mr. Bernanke, please take off, and drop the cash as you've promised. Trillions, sir, trillions.
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This article has 65 comments:
as you have not lived through inflationary times, let me assure you that your scenario will make you less well off tomorrow.
Some argue that it will build inflation but I doubt, the slowing economy is like an atomic bomb for inflation fearing freaks, the competition began in the world economy and it's name " I CAN SELL IT EVEN CHEAPER" as those industries that will insist on old (2007-2008) prices will be squeezed to bankruptcy by those that can sell it cheaper.
Already there are many brands that cheat us and steal our money, this can be a washing machine soap a car or a milk.
Each brand spends days and nights of thinking how to trick consumers into buyers of their product, I can promise you that from 10-20 brands of milk all of them are the same with same milk inside, all organic milk brands have the same organic milk inside.
The difference in price is the difference of how good company tricked you.
In this crash the survivors will be industries that will say to themselves, I STOP WITH TRICKS I SELL FOR WHAT MARKET PAYS ME and those industries and companies that will say I AM THE BEST will see their stock prices (like MSFT yesterday) fall down very hard and go bankrupt.
There is no a single monopoly that can withstand the bear market like this one that will last 20-30 years, if MSFT will not lower it's prices, even few years will not pass when new competitor from nowhere will appear with operating system for 70% off and computer manufacturers will be happy to work with him AS HE IS CHEAPER AND SAVES THE MONEY.
Printing money really helps!
Sure, our government can print trillions of dollars and borrow trillions more for "stimulus" packages, but pretty extreme consequences will result. Because the dollar has been the worlds reserve currency for the past few decades, foreign central banks have built up massive reserves of dollars. These, among other things, helped maintain lower inflation then would have otherwise been manageable, allowing the US consumers to go on a huge trade deficit inducing spending spree for the past two decades and allowing the government to finance programs and wars it would have otherwise been unable to.
As a result? We have the highest personal debt to GDP ratio in our history, passing the levels reached in 1929 a couple of years ago. American consumers owe trillions, the government owes trillions and has less foreign reserves than Libya(haha, is that possible?) and foreigners are going to be getting itchy. You want to know whats going to set them off? Printing money without worries. As soon as the printing presses crank up to full speed, speculator pull their money out of treasuries(they will) and the value of the dollar starts falling, these foreigners are not going to like the fact that their reserves are rapidly falling in value. As soon as the world loses faith in the dollar.... BOOM, they drop their reserves and hyper inflation is nock'n.
Lets see if Obama takes Paul Krugman's (and now your) advice. I've already moved out of dollars and am thinking about shorting treasuries, but you have fun with you printing press. Let me know how it goes.
That's the spirit! Bring it on! ... if it only were so easy...
Trouble is, that as well as inviduals can be classified as 'subprime' and default on their debt, so can nations.
money in itself is not wealth. its debt. A fractional reserve system is a debt based system....so going deeper and deeper into debt gets what?
If there isn't an expansion in production.....printin... money just steals value from the existing dollars in the system......so we basically screw every retiree in the process?
The problem is....we already did the whole creating money out of thin air thing....and this is where it got us. Government intervention into the free markets got us here.
The free market is saying......slow down with this money creation thing.....and let's get back to reality. Wages are growing at much slower pace than everything around it.....and in reality....this is not sustainable.
Wealth is created when one increases thier purchasing power.....when one can buy more value than before.....you are just saying that the dollar value may remain flat or go up.....but the value is left out.....if the dollar prices go up....and your purchasing power goes down...whats the point?
On Jan 23 05:06 AM The hand wrote:
> dirk, how does this create wealth? wealth is what was lost. what
> will happen using your approach is assets will continue to decline,
> wages will remain flat, and all other prices will go up.
>
> as you have not lived through inflationary times, let me assure you
> that your scenario will make you less well off tomorrow.
>
On Jan 23 08:09 AM Andy1234 wrote:
> This article is garbage and is one of the problems with society and
> our government.
>
> money in itself is not wealth. its debt. A fractional reserve system
> is a debt based system....so going deeper and deeper into debt gets
> what?
>
> If there isn't an expansion in production.....printin... money just
> steals value from the existing dollars in the system......so we basically
> screw every retiree in the process?
>
> Get your head out of your ass and create wealth. A printing press....or
> a computer where you keep hitting 0000000's does not create wealth.
> The problem is....we already did the whole creating money out of
> thin air thing....and this is where it got us. Government intervention
> into the free markets got us here.
>
> The free market is saying......slow the F down with this money creation
> thing.....and let's get back to reality. Wages are growing at much
> slower pace than everything around it.....and in reality....this
> is not sustainable.
>
> Wealth is created when one increases thier purchasing power.....when
> one can buy more value than before.....you are just saying that the
> dollar value may remain flat or go up.....but the value is left out.....if
> the dollar prices go up....and your purchasing power goes down...whats
> the point?
True, money has been destroyed, but not wealth.
Wealth was not destroyed. Houses did not burn to the ground. Factories did not turn to rubble. Airplanes did not vanish into thin air. Malls did not vaporize. No real wealth was destroyed. A money illusion of wealth which had been conjured, now turns out to be just what it always was, an illusion. So, time to face reality than to continue attempting to create illusions.
What you advocate is attempting to reflate an illusion that created the overcapacity that you so decry. The money bubble illusion certainly created overcapacity in some areas, at the expense of others. Education, health, environmentally sound energy, all suffer from underinvestment, whereas financial chicanery, shopping, and amusements all have overcapacity. Attempting to perpetuate this warped economy will simply create larger problems down the road.
But the one who needs the least!
On Jan 23 05:42 AM Jerusel wrote:
> It funny that you mention "demand" is disappearing when it was artificial
> in the first place. Fanny, Freddy, low interest rates, easy debt
> and the irrational decision of foreigners to lend us trillions of
> dollar among other things artificially increased our demand for just
> about anything. Its easy to borrow in the present to increase ones
> quality of life, but expect future quality of life to suffer while
> debt is being paid back. Oh, and expect demand to return to normal
> levels.
>
> Sure, our government can print trillions of dollars and borrow trillions
> more for "stimulus" packages, but pretty extreme consequences will
> result. Because the dollar has been the worlds reserve currency for
> the past few decades, foreign central banks have built up massive
> reserves of dollars. These, among other things, helped maintain lower
> inflation then would have otherwise been manageable, allowing the
> US consumers to go on a huge trade deficit inducing spending spree
> for the past two decades and allowing the government to finance programs
> and wars it would have otherwise been unable to.
>
> As a result? We have the highest personal debt to GDP ratio in our
> history, passing the levels reached in 1929 a couple of years ago.
> American consumers owe trillions, the government owes trillions and
> has less foreign reserves than Libya(haha, is that possible?) and
> foreigners are going to be getting itchy. You want to know whats
> going to set them off? Printing money without worries. As soon as
> the printing presses crank up to full speed, speculator pull their
> money out of treasuries(they will) and the value of the dollar starts
> falling, these foreigners are not going to like the fact that their
> reserves are rapidly falling in value. As soon as the world loses
> faith in the dollar.... BOOM, they drop their reserves and hyper
> inflation is nock'n.
>
> Lets see if Obama takes Paul Krugman's (and now your) advice. I've
> already moved out of dollars and am thinking about shorting treasuries,
> but you have fun with you printing press. Let me know how it goes.
This is a patently false statement. No where does it say Congress can "print money" or "outsource" anything. It says Congress has the power to:
"coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;"
Further, it says,
"To provide for the punishment of counterfeiting the securities and current coin of the United States;"
And isn't that what the Fed does, "legalized" counterfeiting?
Also, If Congress can "outsource" then why not just have it delegate all it's authority to the President and crown him dictator?
On Jan 23 08:09 AM Andy1234 wrote:
> This article is garbage and is one of the problems with society and
> our government.
>
> money in itself is not wealth. its debt. A fractional reserve system
> is a debt based system....so going deeper and deeper into debt gets
> what?
>
> If there isn't an expansion in production.....printin... money just
> steals value from the existing dollars in the system......so we basically
> screw every retiree in the process?
>
> Get your head out of your ass and create wealth. A printing press....or
> a computer where you keep hitting 0000000's does not create wealth.
> The problem is....we already did the whole creating money out of
> thin air thing....and this is where it got us. Government intervention
> into the free markets got us here.
>
> The free market is saying......slow the F down with this money creation
> thing.....and let's get back to reality. Wages are growing at much
> slower pace than everything around it.....and in reality....this
> is not sustainable.
>
> Wealth is created when one increases thier purchasing power.....when
> one can buy more value than before.....you are just saying that the
> dollar value may remain flat or go up.....but the value is left out.....if
> the dollar prices go up....and your purchasing power goes down...whats
> the point?
IF we are going to print massive amounts of money to attempt to solve the problem (ignoring all the above mentioned problems which I agree are certain),
THEN we need to ensure that every dollar is spent in a way that improves America's competitiveness
If we did that then after the hyperinflation subsides and we get over losing our status as the worlds reserve currency we would have the worlds leading infrastructure, new patents, new products that are decades ahead of everyone else and a new era of prosperity could begin.
Having said that, since we are taking the destructive path now I don't foresee how we will be so smart as to spend wisely.
"Be careful what you wish for."
You just might get it, good and hard.
It appears that "Zimbabwe" Dirk won't be happy until the FED sends every household a check for $100 Trillion so we can all pay yoff our debts and spend, spend, spend to keep the economy going.
Dirk, have you considered the impact on society as a whole when we reach the point where the US dollar becomes a "hot potato" and nobody wants to keep it in their pocket overnight for fear it will lose too much value? Research Weimar Germany. They had to pay people twice a day because the value of the Mark fell so fast.
At what point do you suppose the rest of the planet will decide they don't want dollars either? When we get there and every other country rushes to sell their dollar based holdings for whatever they can get, how do you think that will impact international trade, or prices here in the US?
Do some research Dirk. Read some works from the Austrian School of economics. Google "crack up boom". What you are proposing is what got Zimbabwe where it is today and it ain't pretty.
On Jan 23 09:59 AM Carl Spackler wrote:
> I agree with a lot said in here, but you have another scenario that
> could be reached by printing money - stagflation. That means economic
> stagnation with inflation. In fact, even though you hyper-inflate
> the money supply, in real dollar terms, the economy goes nowhere.
> Just imagine growth rate of 8% with 10% inflation. Funny that no
> one considers this as a possible response to all the helicopter drops
> the Fed is doing. When I studied economics, this was to me by far
> the worst scenario (even over deflation). With deflation, you can
> always inflate the economy by printing cash, but with stagflation
> you have to deflate the money supply and at the same time try to
> pick up the economy - a herculian task.
All money is debt, I get paid in debt. You have to accept it.
I guess there will be no milk today.
Oh, will you take a credit card? Great, milk, got milk.
The USD is the currency of this country. This currency is accepted in the US of A. It is not Debt. Credit is debt.
Issuance of Treasuries regardless of type are Credits given us by other nations. Eventually that credit will be repaid But just like we repay over time, so will the USA.
The problem then is when will the Credit limit be reached? I do not know, no one knows. As long as the USD remains strong, the limit has not been reached.
Assets VS Debits, Accounting 101, in my paws, it remains an asset. (Alpha Male, Wolf pack #1).
Or, in human terms, Society's type A's. Can a Mensa be an Alpha Male?
We can't print money indefinately and there is certainly a danger it will lead to mal-investment and inflation if it is not used wisely.
Right now, global deflation is setting in - seems like the perfect time to use this. $10+ trillion in wealth evaporated, I don't think printing $2 trillion and buying & retiring US Treasuries is going to cause massive inflation - it will simply slow down the deflation.
Although that is not enough by itself, if we indicate we are willing to devalue the dollar it should lead China & Middle East countries who are sitting on several trillions to question whether their money is safe - they will probably decide instead to buy up assets like commodities, real estate & company stocks.
The US dollar will sharply "devalue" (really only against countries like China and the Middle Eastern oil exporting countries), but this is in fact a great thing for almost everyone. It will correct the artificially devalued chinese and middle eastern currencies that for so long have been pegged to the dollar & other western currencies even as their economies grew more rapidly. Finally US & European industries will be able to compete again on a level playing field. Chinese citizens end up much wealthier in terms of what they can afford to buy and when they travel to other countries.
The only losers would be the sovereign wealth funds who are sitting on trillions of dollars, but I wouldn't waste many tears on them since they'll still be absurdly wealthy - just slightly less so.
On Jan 23 11:04 AM DougM wrote:
> Dirk, on the other side of those loans are millions of savers who
> did not recklessly overleverage themselves. Your plan to wipe away
> the debts of the imprudent through inflation will come at their expense.
> What's your plan then, take them all on as wards of the state, printing
> yet more money for that? And what do you think will happen in the
> long run if you prop up the over-consumers at the expense of the
> savers? Google Warren Buffett's 2003 article in Fortune where he
> talks about Squanderville and Thriftville.
1) Kept rates up at about 4%, so as to not penalize the savers -- those who chose WISELY.
2) Massive tax cuts, so that we all have more of OUR OWN income to use towards paying down debt. Both of these focus on rewarding savings vs. debt -- and that is the core issue that caused this mess.
3) Big cuts to government -- needs to live within its means...and its means need to be decided by US, not by THEM. I.e., consumptive taxation, not confiscatory taxation, plus a Balanced Budget Amendment.
What is also sobering and revealing is the number of responses in support of his ideas here. PEOPLE - THE DEFINITION OF INSANITY IS TO KEEP DOING THE SAME THING AND EXPECTING A DIFFERENT RESULT!!
The sad thing is, these same people would have voted again for our last president, given the opportunity. Thanks for calling it how it is, ANDY1234. Anyone opposed to what Andy said in his post needs to have their heads examined, for sure.
If anyone doubts that Helicopter Ben is inflating the money supply, go to the Fed website that shows M1 money supply; it has almost tripled since September, and the graph looks like the famous "hockey stick" graph that the global warming purveyors use to show the supposed increase in global temperatures - only this hockey stick is real. Right now all this money is being absorbed by the banks because of horrible lending conditions and the fact that the Fed is paying interest on reserves, but sooner rather than later the paltry interest rates will no longer make sense and that money will flood into the economy.
The result? Hyperinflation looms. No, not Zimbabwe-style, but probably 100% inflation per annum. Just think what that means for the Social Security ponzi scheme, which has built-in COLA increases. How about medical prices - how can Medicare/Medicaid be maintained when they too are untold trillions in the red now?
Right now we're experiencing price deflation in many sectors, which is an unmitigated good thing. It must not be confused with monetary deflation, which only happens when people withdraw money from the economy, i.e. stuff it in mattresses. When they put it in their savings account it goes back into the economy via loans, which is exactly what we need to spark the economic recovery. The last thing we need is monetary inflation.
My gold and silver stocks should do well.
What will be the long-term effect on the economy? Probably some good and some bad. The fact is, the US is in debt beyond its ability to ever repay.
There are two choices, chapter 11 for the United States of America, or inflate until our debt is diluted to a manageable level.
Our creditors may not like the inflation solution, but they should appreciate the fact that they are better off getting some of their money back that have the US go into default, such that the creditors lose everything.
As they say, if you are a small debtor having a hard time paying your debts, you are in trouble. If you are a big debtor having a hard time paying your debts, the bank is in trouble.
The US is the biggest debtor ever. You can't squeeze blood out of a turnip. Inflate or default. Those are the only options.
For? Anyone....
Inflation will help solve the social security and medicare problems.
The spending on those programs goes up, but if inflation is high the spending will not go up as fast as inflation.
(keep in mind that the way the govt now calculates inflation gives inflation figures that substantially understate actual inflation)
Thus, with a high inflation level, real spending on programs on Medicare and Social Security will go down. Of course, that will mean that the medical services received by Medicare recipients will decline, and the real spending power of social security checks will diminish.
But so what? Because of the hole the US has dug itself into economically, there is NO SOLUTION that will not lead to a declining standard of living.
Inflation seems like the most obvious way to implement that economic decline in an orderly manner, since government clearly lacks the ability to make hard choices in cutting less justifiable programs in order to keep its higher priority programs intact.
INFLATION IS THE ANSWER.
The crash we are in is a debt fueled crash, as good debt changes to bad debt. The boom you describe was fueled by decades of cheap, easy, unlimited credit that built up a mountain of debt. All it took was a brief downturn to get the bad debt ball rolling. Now every debt service payment that is not made destroys earnings and weakens another domino in the line of creditors holding consumer debt.
Printing more money and LOANING it will just increase the debt load that is currently being vaporized. NOT a good idea.
Background...I don't have 10 doctorate degrees but am pretty good...at least I think so.
Let me just state some facts:
-Oil supply is higher...extremely higher than expected.
-Imports are very very high.
-SUPER CANTANGO exists
-Trillions of dollars will be spent worldwide to stimulate growth especially here in the US
-Everyone who can is leasing tankers to store oil.
-OPEC and all oil producing are losing trillions..not just on production but also their investments (Dubai!!!)
Now, just a Keynesian perspective (which for the most part has been working since the 40's after the "classical economists" killed us during the depression), oversupply leads to a cut in supply, that eventually leads to a rise in demand b/c of no more production, that leads to a rise in price.
Am I wrong? Are things really that bad that will kill oil and growth for the next 4-6 quarters like most analysts write about??
It just makes common sense that with all this "stimulus", contango, hording...that a price increase in oil isn't a far out thing. It's here. It's now.
No doubt oil was way to high...and if you got suckered in to buy (or write about it at $120-140)...it was common sense that it shouldn't have been there. Just like now...at least in my opinion...it should not be this low.
What do you think? Am I way off??
Another reason inflation provides the prospect of an orderly lowering of the standard of living in the US. (which I have pointed out is inevitable)
With high unemployment, wages are not going to go up much over the coming years.
Thus, in the face of substantial inflation, real wages are going to decline in the coming years.
That is unfortunate for the wage earner, but the point is to object to it is like objecting to the sun coming up in the morning. It is an inevitability.
Inflation is the best solution for an orderly downsizing of the United States of America.
One other point: Forget about the US remaining the world's superpower. As we become an economy more on the scale of Indonesia or France, we will no longer be able to sustain a superpower level of military power. Unless we can establish a new role of the US as the "soldier of fortune" to the world. That would mean that we would no longer be spending vast sums of our own money for military ventures that the rest of the world doesn't want us to be involved in. It would mean we would shut down our military involvement around the world, and tell countries that we are happy to sell security services to them.
Face it, that is about the only thing the US is still good at, military. It is ridiculous for an economic basket case to be going out spending our own money on deploying those resource, especially when no one else in the world supports what we are doing.
But, the fact is we have been the glue that has kept the world from breaking up into regional wars all over the place. I wouldn't be surprised if many countries in the world, after discovering what a precarious situation they are after we pull back from military involvement around the world, decide it is worth it to hire us to provide them security services.
Lots of details to work out of course, like which governments would we refuse to work for on account of their human rights record or whatever.
(most likely, as the US economy deteriorates further, public opinion will say- hey I don't care if it's Idi Amin, anyone who is willing to pay us, let's work for them and provide some jobs for US soldiers.
"the graph looks like the famous "hockey stick" graph that the global warming purveyors use to show the supposed increase in global temperatures - only this hockey stick is real"
97% of active climate scientists say you are wrong, but I guess you and the oil companies and their massive disinformation campaign are right. You have been fooled by the biggest propaganda campaign in history. It is no different than what the tobacco companies did, when they claimed smoking was safe. In fact they use the same scientist shills.
Like most deniers, you use the same worn out arguments that have been thoroughly disproven and debunked. Try gettting your information from real climate scientists like at realclimate.org, Desmogblog, Openmind, Deltoid, Watthead, Grist, etc. If you were truly a skeptic, you would be skeptical of the denier propaganda campaign and their phony scientists, and their phony lists of skeptic scientists. Yes everyone of those lists is bogus.
It's no accident that laymen and gullible skeptics like you represent nearly half the population, when the numbers for actual climate scientists are an overwhelming majority, with only the handful of scientists who are paid by the oil and coal companies on the other side.
As famed climat scientist James Hansen, head of NASA's Goddard Institute for Space Studies, and the one who Bush censored, says.
"The disinformation campaign today borders on crimes against humanity. We do know the consequences of inaction."
Take your fake hockey stick graph story to the blogs of real climate scientists and they will have your head.
Keep to a subject you actually know something about and you will be better off.
For the rest of readers, sorry for the off topic content, but he asked for it.
scienceblogs.com/delto...
Article on Hockey Stick and NAS study that proves it's validity.
gristmill.grist.org/st...
When the banks deny credit, our system falters because our system is based on dollars being created by banks in response to people and organizations being willing to take on debt. If new credit (equal to the debt principle) is not continually added to the system in response to such willingness to take on debt, then paydown of debt by existing debtors extinguishes the money supply causing other debtors to find it even more difficult to earn the funds needed to pay down their debts, principle plus interest.
The author is therefore correct in saying the essence of the problem in a crisis such as this, a credit crunch, is not enough money in the system. He is incorrect in saying that the Government and the Fed are capable of supplying that money in a way that will help, given our debt-based origination mechanism for creating new money.
I understand that this is an investment web site, and very few who post here consider it likely that our monetary system will be redesigned in the next year, so any mention of what is needed to REALLY solve the financial crisis is not likely to help make investment decisions in the next six months. However, if the dollar truly does self-destruct in a hyperinflationary scenario at some point down the road, because of Government and Fed efforts to pump cash into the economy, a rare opportunity to re-design the monetary system might present itself.
We would all be better off if some way could be found to transition to a better monetary system without a collapse of the existing system, but as the existing system is a private, for profit system, the Fed and its supporters are not likely to look favorably on any proposal for a new system. For the present, we remain desperately searching for ways not to be screwed by the financial machinations at the highest levels in Washington and Wall Street.
On Jan 23 08:09 AM Andy1234 wrote:
> This article is garbage and is one of the problems with society and
> our government.
>
> money in itself is not wealth. its debt. A fractional reserve system
> is a debt based system....so going deeper and deeper into debt gets
> what?
>
> If there isn't an expansion in production.....printin... money just
> steals value from the existing dollars in the system......so we basically
> screw every retiree in the process?
>
> Get your head out of your ass and create wealth. A printing press....or
> a computer where you keep hitting 0000000's does not create wealth.
> The problem is....we already did the whole creating money out of
> thin air thing....and this is where it got us. Government intervention
> into the free markets got us here.
>
> The free market is saying......slow the F down with this money creation
> thing.....and let's get back to reality. Wages are growing at much
> slower pace than everything around it.....and in reality....this
> is not sustainable.
>
> Wealth is created when one increases thier purchasing power.....when
> one can buy more value than before.....you are just saying that the
> dollar value may remain flat or go up.....but the value is left out.....if
> the dollar prices go up....and your purchasing power goes down...whats
> the point?
Savers don't like the idea of the government reducing the value or yield of their hard-saved money, while reducing the burden on those who got into debt. It just seems unfair.
Thus when a vast amount of money vanishes, as it did during the great depression, the end of Japan's real estate bubble, and the end of the US real estate / commodities bubble, most economists recommend that government step in to stabilize the money supply with an expansionary policy before a deflationary spiral ensues. However, the owners of cash and debt securities always step in to block this action, as deflation seems to be in their short-term interests (plus, their wealth and influence relative to everyone else has increased greatly by being in cash/bonds through the crash).
The political wrangling inevitably reduces the size of expansionary efforts to less than the size of the contraction in the money supply, which results in failure to stop deflation. Efforts to stop the great depression were too little and too late resulting in a decade of hardship. Japan's zero-percent interest rates were also too-little, too-late resulting in two decades of deflation and economic stagnation. The verdict is still out on who will win this time.
"how does this create wealth? wealth is what was lost."
"Wealth was not destroyed. Houses did not burn to the ground. Factories did not turn to rubble. Airplanes did not vanish into thin air."
"money in itself is not wealth. its debt. A fractional reserve system is a debt based system....so going deeper and deeper into debt gets what?"
"The entire world runs on dollars and that's why we get away with printing it."
Anything can serve as an instrument of trade, but dollars are more portable and less fungible than chickens, or, it seems, rubles. The dollar devalued by over a third as the global economy grew, and then economic activity plummeted as the dollar strengthened. While houses and factories are still standing (for the most part), utilization has dropped, and these assets are not producing anything (shelter, goods, services). Dollar-denominated debt money is backed by a promise of repayment of production- and don’t lose site that more production is a good thing.
"you mention "demand" is disappearing when it was artificial in the first place."
"We have the highest personal debt to GDP ratio in our history, passing the levels reached in 1929"
"our GDP/Debt ratio is so ridicoulus distorded."
"as inviduals can be classified as 'subprime' and default on their debt, so can nations."
The Roaring 20s were a period of incredible growth and advances in living standards. The same nearsighted crowd worried about inflation created the Great Depression then, and crashed GDP on a global scale. Hopefully we’re smarter now.
"No where does it say Congress can "print money" or "outsource" anything. It says Congress has the power to: "coin money, regulate the value thereof, and of foreign coin"
Coin money, print money, affect exchange rates- this is what the Fed and Treasury do, together.
"The solution isn't to go get more giant pumps to inflate the bastard thing even more beyond its capacity, twill just make the eventual pop that much more damaging."
"THEN we need to ensure that every dollar is spent in a way that improves America's competitiveness"
This is the crux of the issue- is our economy (creation and distribution of goods and services) better when it’s a giant, interconnected, complex thing, or are we better living like the Amish? No offense to the Amish, but we won’t call them to address the killer asteroid, killer virus, killer jihad, or lesser troubles such as the mediocrity of my HDTV signal. While it’s reasonable to worry about a “Tower of Babel” economy, it’s much more reasonable to focus on strengthening the foundations of that tower than shaking it and then watching it tumble.
"It appears that "Zimbabwe" Dirk won't be happy until the FED sends every household a check for $100 Trillion so we can all pay off your debts"
"Dirk, have you considered the impact on society as a whole when we reach the point where the US dollar becomes a "hot potato" and nobody wants to keep it in their pocket overnight for fear it will lose too much value?"
"The US dollar will sharply "devalue" (really only against countries like China and the Middle Eastern oil exporting countries), but this is in fact a great thing for almost everyone."
If you read my article you know I didn’t ask for $100 Trillion, or to pay off all debt. But I do agree that printing money to use to pay off Treasuries, and seeing continued weakening of the US dollar, would be a good thing. When everyone wants to buy what you’re selling, perhaps you’ve priced it too low, so creating a “warm potato” just means that the Chinese will want to cash in on dollar-denominated goods and services and assets. Why can’t more Chinese own vacation property in California and Colorado?
"And I used to think Johnny Depp was a jerk for moving to France. I think I might ask him if he has extra room for me soon if we keep going in the direction Dirk is suggesting."
"Are things really that bad that will kill oil and growth for the next 4-6 quarters like most analysts write about??"
Things are bad enough that we just empowered a group of people who aren’t afraid to confiscate more of your savings and give it to people who aren’t producing anything. Things are bad enough that people are resorting to fraud and, potentially, violence. Taxes and social unrest are much more likely to induce someone to move to another country than if their dollar ETF is doing poorly.
"Inflation is the best solution for an orderly downsizing of the United States of America."
"Why not go all the way and get a constitutional amendment enshrining the right to bubbles?"
“It gives me hope that economic education is occuring. I attribute this entirely to the proliferation of sound economic analyst on the internet”
It would be nice if more folks actually understood the differences between fiscal vs. monetarist vs. noninterventionist policies, and could keep the names straight. I’m not a fan of the Austrian school because they don’t understand how monetary intervention is more to blame for economic crisis than some seven year economic bogeyman. I’m not a fan of Keynes because he’s only worried about moving around pieces of the same pie and would allow the government to create the winners and losers. I’m a big fan of monetarist thinking, and had the Fed not increased interest rates 18 times in their Quixotic quest to force long term market interest rates up (why? because we wanted bigger houses and could get them built?) attacking the innovators and risk takers upon which our modern economy depends for investment and production, I wouldn’t be pushing for extreme monetary expansion now. But they did- and I am.
On Jan 23 02:54 PM Dirk McCoy wrote:
> Thank you for the comments. A few stood out:
>
> "how does this create wealth? wealth is what was lost."
> "Wealth was not destroyed. Houses did not burn to the ground. Factories
> did not turn to rubble. Airplanes did not vanish into thin air."
>
> "money in itself is not wealth. its debt. A fractional reserve system
> is a debt based system....so going deeper and deeper into debt gets
> what?"
> "The entire world runs on dollars and that's why we get away with
> printing it."
>
> Anything can serve as an instrument of trade, but dollars are more
> portable and less fungible than chickens, or, it seems, rubles.
> The dollar devalued by over a third as the global economy grew, and
> then economic activity plummeted as the dollar strengthened. While
> houses and factories are still standing (for the most part), utilization
> has dropped, and these assets are not producing anything (shelter,
> goods, services). Dollar-denominated debt money is backed by a promise
> of repayment of production- and don’t lose site that more production
> is a good thing.
>
> "you mention "demand" is disappearing when it was artificial in the
> first place."
> "We have the highest personal debt to GDP ratio in our history, passing
> the levels reached in 1929"
> "our GDP/Debt ratio is so ridicoulus distorded."
> "as inviduals can be classified as 'subprime' and default on their
> debt, so can nations."
>
> The Roaring 20s were a period of incredible growth and advances in
> living standards. The same nearsighted crowd worried about inflation
> created the Great Depression then, and crashed GDP on a global scale.
> Hopefully we’re smarter now.
>
> "No where does it say Congress can "print money" or "outsource" anything.
> It says Congress has the power to: "coin money, regulate the value
> thereof, and of foreign coin"
> Coin money, print money, affect exchange rates- this is what the
> Fed and Treasury do, together.
> "The solution isn't to go get more giant pumps to inflate the bastard
> thing even more beyond its capacity, twill just make the eventual
> pop that much more damaging."
> "THEN we need to ensure that every dollar is spent in a way that
> improves America's competitiveness"
>
> This is the crux of the issue- is our economy (creation and distribution
> of goods and services) better when it’s a giant, interconnected,
> complex thing, or are we better living like the Amish? No offense
> to the Amish, but we won’t call them to address the killer asteroid,
> killer virus, killer jihad, or lesser troubles such as the mediocrity
> of my HDTV signal. While it’s reasonable to worry about a “Tower
> of Babel” economy, it’s much more reasonable to focus on strengthening
> the foundations of that tower than shaking it and then watching it
> tumble.
>
> "It appears that "Zimbabwe" Dirk won't be happy until the FED sends
> every household a check for $100 Trillion so we can all pay off your
> debts"
> "Dirk, have you considered the impact on society as a whole when
> we reach the point where the US dollar becomes a "hot potato" and
> nobody wants to keep it in their pocket overnight for fear it will
> lose too much value?"
> "The US dollar will sharply "devalue" (really only against countries
> like China and the Middle Eastern oil exporting countries), but this
> is in fact a great thing for almost everyone."
>
> If you read my article you know I didn’t ask for $100 Trillion, or
> to pay off all debt. But I do agree that printing money to use to
> pay off Treasuries, and seeing continued weakening of the US dollar,
> would be a good thing. When everyone wants to buy what you’re selling,
> perhaps you’ve priced it too low, so creating a “warm potato” just
> means that the Chinese will want to cash in on dollar-denominated
> goods and services and assets. Why can’t more Chinese own vacation
> property in California and Colorado?
>
> "And I used to think Johnny Depp was a jerk for moving to France.
> I think I might ask him if he has extra room for me soon if we keep
> going in the direction Dirk is suggesting."
> "Are things really that bad that will kill oil and growth for the
> next 4-6 quarters like most analysts write about??"
>
> Things are bad enough that we just empowered a group of people who
> aren’t afraid to confiscate more of your savings and give it to people
> who aren’t producing anything. Things are bad enough that people
> are resorting to fraud and, potentially, violence. Taxes and social
> unrest are much more likely to induce someone to move to another
> country than if their dollar ETF is doing poorly.
>
> "Inflation is the best solution for an orderly downsizing of the
> United States of America."
> "Why not go all the way and get a constitutional amendment enshrining
> the right to bubbles?"
> “It gives me hope that economic education is occuring. I attribute
> this entirely to the proliferation of sound economic analyst on the
> internet”
>
> It would be nice if more folks actually understood the differences
> between fiscal vs. monetarist vs. noninterventionist policies, and
> could keep the names straight. I’m not a fan of the Austrian school
> because they don’t understand how monetary intervention is more to
> blame for economic crisis than some seven year economic bogeyman.
> I’m not a fan of Keynes because he’s only worried about moving around
> pieces of the same pie and would allow the government to create the
> winners and losers. I’m a big fan of monetarist thinking, and had
> the Fed not increased interest rates 18 times in their Quixotic quest
> to force long term market interest rates up (why? because we wanted
> bigger houses and could get them built?) attacking the innovators
> and risk takers upon which our modern economy depends for investment
> and production, I wouldn’t be pushing for extreme monetary expansion
> now. But they did- and I am.
If you think the lack of government intervention and stimulus is what created the great depression, you are sorely mistaken. Hoover implemented the greatest intervention into the reccesion the US had ever taken and FDR left off where he started. Hoover is absolutely analogous to Bush, lets see if Obama follows FDR's path. Hint? (He will)
"I’m not a fan of the Austrian school because they don’t understand how monetary intervention is more to blame for economic crisis than some seven year economic bogeyman."
If you think the Austrian school of economics is guesswork, I would have to say that Austrian economists are pretty damn good guessers! You are wrong to assume a misunderstanding of monetary consequences as well. Peter Schiff, Jim Rogers, Ron Paul, and Gary North among others predicted this crises many years ago with their analysis focusing heavily on monetary policy.
You analysis is so packed full of economic contradictions and falsehoods that refuting it point by point would be prohibitively laborious. A apt description of your world view would be an amalgamation of all the questionable parts of various schools of thought, just sort of an unorganized soup of economic terminology.
I doubt one could find better descriptions of a similar crisis than those of Murray Rothbard. If you are interested in changing your economic reality into something that will stand the test of time, there is no better mentor. Here is a great place to start.
www.lewrockwell.com/ro...
Watch the movie "money as debt." It seems overly simplistic and childish at times but the information is hard to come by and in my opinion, invaluable.
I have thought about a similar scenario on many occasions. There is a way out of this mess through inflationary measures. If the government cuts spending, especially military and oversees, and began printing money at a consistent rate to increase inflation and cut taxes to keep people employed as well as start pay off the debt, we could wiggle our way out of this. It would be difficult for the federal government to pay down 11 trillion in debt without decreasing the value of the dollar by creating more dollars. The only problem is the government is addicted to revenue for purely political purposes. They will not reduce spending and any increased revenue through inflation and money creation will quickly be spent on already preexisting obligations. They are going to add more coal to the fire till the engine explodes.
Your description of a monetary solution could be workable if the government acted responsibly. Do you see that happening?
Another thing. I do not think the people of the world would pay for a military that is bigger than most national GDP's combined and I don't think I am comfortable with turning our government into a mercenary force for the world, which is sort of already is. The world doesn't need a huge military to be prosperous and safe. If anything, our military adventurism has done the opposite.
On Jan 23 01:24 PM lance sjogren wrote:
>
> Another reason inflation provides the prospect of an orderly lowering
> of the standard of living in the US. (which I have pointed out is
> inevitable)
>
> With high unemployment, wages are not going to go up much over the
> coming years.
>
> Thus, in the face of substantial inflation, real wages are going
> to decline in the coming years.
>
> That is unfortunate for the wage earner, but the point is to object
> to it is like objecting to the sun coming up in the morning. It
> is an inevitability.
>
> Inflation is the best solution for an orderly downsizing of the United
> States of America.
>
>
> One other point: Forget about the US remaining the world's superpower.
> As we become an economy more on the scale of Indonesia or France,
> we will no longer be able to sustain a superpower level of military
> power. Unless we can establish a new role of the US as the "soldier
> of fortune" to the world. That would mean that we would no longer
> be spending vast sums of our own money for military ventures that
> the rest of the world doesn't want us to be involved in. It would
> mean we would shut down our military involvement around the world,
> and tell countries that we are happy to sell security services to
> them.
>
> Face it, that is about the only thing the US is still good at, military.
> It is ridiculous for an economic basket case to be going out spending
> our own money on deploying those resource, especially when no one
> else in the world supports what we are doing.
>
> But, the fact is we have been the glue that has kept the world from
> breaking up into regional wars all over the place. I wouldn't be
> surprised if many countries in the world, after discovering what
> a precarious situation they are after we pull back from military
> involvement around the world, decide it is worth it to hire us to
> provide them security services.
>
> Lots of details to work out of course, like which governments would
> we refuse to work for on account of their human rights record or
> whatever.
>
> (most likely, as the US economy deteriorates further, public opinion
> will say- hey I don't care if it's Idi Amin, anyone who is willing
> to pay us, let's work for them and provide some jobs for US soldiers.
www.stanford.edu/~johntayl/FCPR.pdf
I also think the excerpt from Rothbard's book that Jerusel provided is more than substantial to refute the claims that increasing cash liquidity and using inflation as a fuel for the economy could ever be considered rational.
Hell, it will be cheaper to heat your home with dollars than wood once Dirk gets his wish. I Hope the ink they use is not a carcinogen when burnt.
"You are arrogantly assuming that all of our problems are purely a monetary phenomenon."
No, I'm arrogantly assuming that most of our economic problems are purely a psychological phenomenon. Consumers and companies, all over the world, are pulling in their horns. Why? If you actually read my article you saw that Fed policy caused great fear amongst a significant portion of both homeowners and business. When you have a 4% ARM, and are confronted with the possibility of an 8% rate, any rational actor will not only look at spending less, but also at selling. Home listings soared. And business? If you've ever had a line of credit then you know that when prime (which tracks fed funds) increases, you not only have greater debt service, but must also make additional profit to maintain profitability ratios. This had its expected effect- business growth slowed dramatically. So demand for houses dropped just as supply grew. I will not waste time arguing that Fed funds rates were too low, other than to ask- if low rates were so bad, why are we back there now?
"Peter Schiff, Jim Rogers, Ron Paul, and Gary North among others predicted this crises many years ago with their analysis focusing heavily on monetary policy."
Some of these guys have predicted downturns for years, blaming easy money, and the global economy grew in spite of their pronouncements. When the Fed actually increased fed fund rates, their predictions came true, supporting my analysis much moreso than theirs.
"I doubt one could find better descriptions of a similar crisis than those of Murray Rothbard."
"If you think the lack of government intervention and stimulus is what created the great depression, you are sorely mistaken."
Again, please differentiate between interventionist fiscal policy and my proposal to reverse interventionist monetary policy. I am a big fan of Murray Rothbard, and agree with much of his analysis- except he overlooks the Federal Reserve's rate increases starting in the spring of 1928 that lasted through the recession starting in fall of 1929, which were in my opinion (and Friedman's and Bernanke's) more to blame.
Let me repeat- I am not in favor of government intervention, other than to undo the damage they did between 2004 and 2006 that caused this mess. Obama and Hoover share more similarities than Bush and Hoover- I'm pleading with Mr. Bernanke to follow through on what he knows needs to be done to turn this around before voters come to the conclusion he is powerless to make a positive difference, and entrust our economic future to people that neither Murray Rothbard or I trust to make the right decisions.
Last time I checked, 4% or 5% is not a historically high interest rate and the only reason it has the appearance of hurting the economy is because it brought to light all the fools that over leveraged themselves.
Debt to equity cannot perpetually increase forever, but that seems to be what you expect. Maybe the fED can institute a negative interest rate and we can be paid for taking out loans. I'm sure that would go over well too.
At the same time the authors idea of flooding the market with dollars is just downright scary. This contraction is happening essentially because we over built in all kinds of ways to meet a temporary demand fueled by expanding debt. Yes we can expand government debt but isn't that really just more fuel on the fire. What happens when the taxpayers can no longer support the burden of the debt. This can't go on forever so this line of reasoning is false.
Now Austrians hear me out. I propose that instead of a Keynesian solution where government exchanges treasuries for dollars we just allow the Fed to exchange dollars for oil. The Fed could park the physical oil in those new caves they are creating for the Strategic Petroleum reserve. Thus the newly printed dollars are backed by oil. The strategic reserve is filled. The Austrians are correct that the new dollars placed into circulations WILL spark massive inflation once the velocity of money reverts back to the norm or mean. When this happens the Fed only needs to dump that stored oil back on to the market to destroy the dollars it just put into circulation. Thus the net result could be neutral increase in the supply of dollars but a short term solution to get us through the hoarding period. Also keep in mind that the new dollars while in circulation will help banks with their capital reserve crisis.
The problem with the Keynesians is that they use the newly printed dollars to create their empire of Fascism. Plus the tax payers are ever paying interest on the governments forever debt. Thus the Keynesians enslave us and the politicians and bankers become our rulers. The Keynesians NEVER remove the dollars from circulation and NEVER reduce government debt loads.
The problem with the Austrians is that their solution is to prevent these problems in the first place. That is if the Fed would stop manipulating the money supply and the banks would stop overleveraging then the economic cycles would shorten and be less volatile. In other words the ups and downs would be frequent and manageable through the natural mechanisms of capitalism. Free market capitalism like nature would direct economic activity for the benefit off all mankind.
I only propose the above solution as one to be implemented only when a deflationary spiral in imminent. Once the death spiral is terminated they must start listening to the Austrians. If they don’t then commodity markets as well as currencies could become even more volatile upsetting prices to the standpoint that capitol can no longer efficiently be deployed. I realize that the Fed is doing this somewhat when they buy securities off all kinds. Problem is that these securities could be worthless. Oil/Gold has value. The Fed should probably buy a basket of commodities (Not futures....real physical assets). We could even start a Moses project where we create stores of food in case of a national agricultural catastrophe.
Ultimately less face it the Fed is going to print money. Lets just hope they back it with something of value. NOT GOVT TREASURIES
I'd have to ask what you thought the foolish choices were that kept our standard of living from achieving what you think it should have, but first a couple truths:
1. Global standard of living increased by the greatest amount in human history. Record percentage of people living on peace, and huge chunks of humanity moved from poverty. Meanwhile, living standards in the US increased as well- a minimum wage worker of 2008 was able to work less than half the time of a minimum wage worker of 1980 to afford rent, food, clothing, cell phone, video player, airfare to Florida, and an MRI.
2. Global standard of living has started to fall the past 6 months, thanks to deflation caused by Fed interest rate increases in the midst of historic low long term interest rates- not by the historic low long term interest rates.
If you want to compare interest rates to the 1970s, that's your call, but in spite of the foolish choices you think we've made, our ability to supply goods and services to meet our needs is significantly greater now.
For anyone who wants to implement some new ideas(talking mainly austrian economics) you basically want to change a problem with an answer from a whole different game. It won't work, actually it will cause a complete shutdown of the financial system and worse the day to day world.
To put it simply if you had 2 options:
A.Pump in more money, kick the can down the road and prove to people there will always be more people to take up the slack(until a meteor takes out the world)...Yes its a Ponzi scheme, but a Ponze scheme is only a problem if it comes to an end. Guess what when it comes to the US or World economy there is NO REASON for it to ever end. Anyone arguing otherwise is part of the problem.
B.Stop the world to "fix" the budget. To cut emissions. To save Mother Earth from Humans. Sure lets go into the dark ages of suffering because we've progressed. Seriously this is what some of you contend is a "good idea". Its an awful idea. Guess what, Mother Earth is going to be fine. Some humans aren't going to do a damn thing to the Earth.
Can we continue to grow, at an increasing pace, or are we running out of the land, oil, breathable air, water, etc. needed to do that?
If growth can be sustained by the obviating of commodities by technology (think: skyscrapers for land, reservoirs and desalinization for water, solar for oil, wireless for copper, etc.) then it makes perfect sense to expand production and expand the money supply and realize that as living standards and economic sophistication increase, families generally have fewer children and actually tend to roughly equilibrium growth rates.
If, on the other hand, we really are going to run out of stuff, then perhaps we need to slow the economy down. What some of my free-market friends here are missing is this- if that's the case, then it's also only fair that everyone receive their fair share, and you will end up with a world government dictated rationing of everything from carbon to water to babies.
Of course, we have some of both now, so perhaps this tension can coexist for a long time. But it's a debate that we should have with facts, not slogans.
On the other hand, if you could know that printing more money would allow banks and individuals and so on to get out of their preexisting contracts by paying them off (at a discount, of course, in dollars that are worth less, but that has to be better than defaulting would be), so that they then could move on to loans and other contracts entered into based on today's economic reality, not yesterday's, then much of the stress on the system would evaporate. It would be like removing a single domino from the middle of a chain. Essentially, it would be like an evenly spread tax on all holders of dollars, to restore flexibility and fluidity. But how you could know that that move would have that effect, I don't know.
The last issue is that current exchange rates create a significant impediment to US participation in the global labor pool- inflation would help with that as well, unless everyone else inflates as much or more, which is quite possible.