Money Supply: The Myth of Hyperinflation 169 comments
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Conventional wisdom is that the Fed’s printing presses are running overtime and the economy is awash with liquidity. Earlier this week the National Association for Business Economics reported that almost half the economists they surveyed believed that Federal Reserve Policy is inflationary. Too bad the NABE-surveyed economists and conventional wisdom are wrong.
Economists, pundits and journalists who climb the soap box to lecture Bernanke & Company about the evils of printing too much money need to take a second look at Federal Reserve policy.
If the Fed critics were correct, then overly aggressive monetary policy would be increasing the amount of money supply and hyper-inflation would be right around the corner. But, inflation is in check and if the Fed keeps on its current monetary trajectory high inflation isn’t in the cards for the U.S.
As it turns out, every week the Federal Reserve publishes statistics on money supply and since December 15, 2008, money supply has increased only marginally. M1 and M2 are up by about 4% and 2.5%, respectively. Such small increases hardly signal an out of control Federal Reserve led by “helicopter Ben” dropping money on the economy.
Fed watchers are correct, however, since the Lehman collapse the size of the Federal Reserve’s balance sheet has more than doubled. However, this growth of Fed size isn’t a warning of impending monetary or economic Armageddon.
While in the last year the size of the Federal Reserve’s balance sheet has grown from a little less than $1 trillion to around $2 trillion, what the Fed detractors neglect to mention is that the Federal Reserve didn’t print money to pay for the purchase of its new assets but rather sucked money out of the banking system that was being hoarded by banks, corporations and individuals. As a result, there was only a tiny net increase in money supply from Federal Reserve intervention. And, with only a small increase in money supply, inflation fears are being blown out of proportion.
Instead of printing “new money” and increasing money supply, Bernanke got banks to deposit their “old money” with the Federal Reserve, which meant that money supply didn’t increase. The Federal Reserve used that old money on deposit to purchase its new assets and grow its balance sheet.
Bernanke encouraged banks to deposit their excess funds at the Federal Reserve by persuading Congress to pass a law that allows the Federal Reserve to pay interest on cash deposits at the Federal Reserve. Prior to the change in law, the Federal Reserve couldn’t pay interest on money deposited, and as a result banks didn’t leave their excess funds at the Federal Reserve Bank. This very technical change in Federal Reserve authority provided Bernanke the magic wand to pull the banking system out of its death spiral without sparking hyper-inflation or running the printing presses overtime. Excess reserves on deposit at the Fed (which are essentially deposits of excess cash by banks at the various Federal Reserve banks around the country) total approximately $800 million and by sucking up excess reserves the Federal Reserve financed about 80% of its policy initiatives.
By recycling existing excess cash, the Federal Reserve stopped the negative effects of cash hoarding and pulled the U.S. out of a full scale depression. Bank cash hoarding at the end of 2008 depressed the velocity of money (i.e., the number of times it turns over each year) which almost caused an economic calamity for the U.S.
In a simple closed economy, annual GDP must equal (a) the amount of money multiplied by (b) the number of times money turns over in a year. If the velocity of money slows down, i.e., the number of times it turns over goes down, then GDP must fall. When the economy was in big trouble, in late 2008, banks, consumers and businesses were hoarding cash, which meant money wasn’t turning over. As a result, velocity dropped like a stone and GDP began to crash.
Bernanke and his staff were brilliant when they figured out how to stabilize GDP by forcing the velocity of money to stabilize and start to rise. Since Bernanke & Co. couldn’t rely upon the banks to recycle excess cash, they used their new authority to vacuum up the hoarded money and had the Federal Reserve Bank assume the role of private banks as an intermediary for money.
Prior to the beginning of 2009, the only successful policy that stabilized velocity of money and stopped panic hoarding was large-scale deficit spending by the central government which ultimately results in wealth redistribution and other social problems. Bernanke didn’t accept the standard prescription of aggressive fiscal intervention and instead invented as new paradigm of monetary policy.
As Bernanke’s policies started to work and panic hoarding lessened, the Federal Reserve began quietly reversing course and pulled back from some of its most aggressive measures. Pundits who question whether or not the Fed has the courage to reverse course and pull out monetary stimulus as the economy recovers need to look at actual data. They will see that there is no shortage of courage at the Fed.
Quietly and without fanfare, the Fed has gotten out of the business of being the lender of last resort for most of the securities market and broker dealers. As of the date of the last Fed report, the Fed had essentially $0 outstanding in its primary dealer, securities repurchase and commercial paper purchase facilities. And, the overall size of the Fed’s balance sheet was down between $100 million and $200 million from its peak level. Even the amount of credit that the Fed is providing to AIG is lower than it was at the height of the crisis. Plus, last week Fed governors started discussing whether or not all of the open market purchases of mortgage that have been authorized will in fact take place.
Every two weeks the Federal Reserve publishes a report that details the composition of its assets and liabilities. It should be required reading for pundits, economists and journalists before they talk or write anything about the Federal Reserve, Bernanke or his staff.
While I don’t agree with everything that Bernanke has done (particularly in the area of regulation), Bernanke and his staff are perhaps the most skilled monetary economists ever.
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This article has 169 comments:
So it seems that while inflation may be temporarily restrained, the velocity paradox is a potentially serious threat to sustained economic growth.
"If the Fed critics were correct, then overly aggressive monetary policy would be increasing the amount of money supply and hyper-inflation would be right around the corner. But, inflation is in check and if the Fed keeps on its current monetary trajectory high inflation isn’t in the cards for the U.S. "
The government is printing 15 to 30 billion dollars a day, depending on which day you choose to look at. So yes, the money supply is increasing dramatically. Mark you state that 'inflation is in check'. Which means that you don't understand that the definition of inflation is an increase in the money supply. Higher prices are a symptom of inflation not a definition.
"While in the last year the size of the Federal Reserve’s balance sheet has grown from a little less than $1 trillion to around $2 trillion..."
The federal Reserve balance sheet changes dramatically from day to day. They do not hold money the have money pass through them on a day to day basis. The reality is that the Fed is is over 2 trillion in hock to foriegn investors through treasury purchases. As Chris Martenson shows; "it took over 350 years to amass the first trillion. If matching over 350 years of increasing foreign indebtedness over just the past 18 months does not indicate that "the government is becoming more indebted to foreigners," then I don't know what does."
www.chrismartenson.com...
"...the Federal Reserve didn’t print money to pay for the purchase of its new assets but rather sucked money out of the banking system that was being hoarded by banks, corporations and individuals."
?! This is fiction. The major banks, were then and are now, insolvent. Perhaps on of the reasons we haven't seen sky rocketing inflation yet is because the banks are hoarding the money the Fed gave them.
"When the economy was in big trouble, in late 2008, banks, consumers and businesses were hoarding cash, which meant money wasn’t turning over. As a result, velocity dropped like a stone and GDP began to crash."
Mark. This is called 'saving'. Its what people do when they realize they have put themselves too far in debt. You are putting the cart before the horse.
"Quietly and without fanfare, the Fed has gotten out of the business of being the lender of last resort for most of the securities market and broker dealers. "
Have we merely all these crappy problems onto the books of the Fed? Have we nationalized all the crap on the central bank (us) books with our banks and foreign lenders off the hook? I would love a straight forward answer to this. What are the imbedded losses that the Federal Reserve has assumed?
People are talking about Deflation. But where is deflation. Ask a common man in U.S if his cost of living has gone up or down?
Printing money does not mean immediate inflation and printing money also does not mean inflation in all asset classes...Since the Fed started to cut interest rates from October 2007, the following has happened:
1)Commodities made a rally first and touched record highs in July 2008 (example of inflation in one asset class)
2)Then all asset classes fell (equities and commodities)...Bond and U.S Dollar rallied significantly...another example of excess liquidity just flowing from one asset class to another (the side effect of money printing)
3)Again equities have gone up and so has commodities since March 2009 and Dollar has weakened and Bond prices also tumbled.
So I must say that Mr. Barnanke has achieved to create volatility in all asset classes and encourage speculation by keeping interest rates low at almost zero...
The U.S. debt to GDP ratio is at 370%...The U.S. would need to pay around $700 billion only on interest payment next year for the Debt in their books...
But the economy is not recovering..Yes the stock markets are...But withholding taxes are still going down...So where is economic recovery?
So Mr. Bernanke has also managed to create a feel good effect through this money printing exercise...
What more...Banks were bailed out using tax payers money...now they trade and speculate with that money...maybe later they would lend this money to taxpayers and charge the taxpayers interest on their own money...All thanks to Mr. Barnanke....
M1 (billions)
8-16-08 1383.3
8-17-09 1658.2
Graph: www.scribd.com/doc/193...
M2 increased less, but still was a little over 8% year over year:
M2: research.stlouisfed.or...
8-17-09 8312.4
8-18-08 7691.4
621 / 7691.4= .0807
Graph: www.scribd.com/doc/193...
Only then will the real power of inflation become realized. After we recover from this deflation. Which you can see because of the inflationary increase in the money supply offsetting it.
No matter how to try to spin it -- we have a huge inflationary bubble sitting just behind every bank tellers window waiting to get out. As one person said, you can't just create wealth by printing money. All you get to do is dilute wealth. So the $100 in my wallet is diluted by the $10,000's Ben has printed on my per capita behalf. Problem is, he's not giving me that $10,000's. So I'm losing out.
Your telling us that they used 80% of 800 million dollars to finance
2 trillion $ in policy initiatives?
UMM, am i missing something here, like 1.93 trillion $?
Do you work at GS or something?
Step 1. When the FED buys Crappy Mortgage Asset (CMA) from DUMB BANK, The FEDs assets go up and the DUMB BANKs cash goes up. To get the money to pay for the CMA, the FED sells bonds, or shorts bonds, but in essence the FED borrows. The result is the CMA goes to the asset side and the shorted bond to the liability side. (this in essence increases the debt/equity leverage ratio of the FED which is not regulated, or audited.)
Step 2. The DUMB BANK now has cash. DUMB BANK doest not like that. They make money by lending, so they lend it to new dumb mortages, credit cards, other banks or back to the Fed. If it becomes a loan, than it appears that nothing happens, but in reality, this loan (cash) becomes a deposit at STUPID BANK.
Step 3. If STUPID BANK takes in a deposit, STUPID BANK is required to put a reserve back to the FED. In the STUPID BANK did not earn interest. This reserve requirement was required so STUPID BANK could access the Fed window in an emergency. The reserve requirement is based on the riskiness of their loan book, but lets call it 8%.
Step 4. STUPID BANK takes in a deposit, and then puts the 8% reserve on deposit at the FED. The rest of the cash recycles to new loans. And so on and so on.... Loans become deposits, deposits require reseerves, new deposits become loans etc. After 12-15 transactions of the banks have recycled the money. The FED borrows the treasury bond, buys the CMA, and then after 12-15 transactions, the FED has gotten in all of it intial purchase price of the CMA in the back door as reserve requirements.
COMMENT: What Bernake did when he "persuading Congress to pass a law that allows the Federal Reserve to pay interest on cash deposits at the Federal Reserve," Bernake INCREASED the profits of STUPD BANK and DUMB BANK, and decreased the profits of the FED.
Step 5: When the FED now goes to sell the CMA or it matures, the FED will take in cash and pay off its loan or shorted Treasury Bond.
However, the money is still out there.
Only after 8 -12 banking transactions will you see inflation.
Is that right?
Am I right?
Or is the author right?
When journalists write "the Fed lowered interst rates," I wish they would substitute it with "The Fed decided that your prudent savings is worth less today and regulated the value of your savings down."
When journalists write "the Fed lowered interst rates," I wish they would substitute it with "The Fed decided that your past work is worth less and gave bankers a raise and you a pay cut."
On Sep 03 01:03 PM cuban wrote:
> The government talks about a national health insurance. We would
> have been better off if they had created a temporary national bank,
> where the government lends people money directly at the same rate
> that they lend the banks. What is happening now is that the government
> lends the banks money at 0.25% and the banks turn around and lend
> us money at 6% so they can pay their CEO's the millions of dollars.
> Goldman made more money than they have ever made, on the backs of
> our retire's bank accounts that now pay 0.15% interest and in the
> midst of the worse economic crisis in recent history. If this happened
> during a republican presidency the democrats would have been screaming,
> but they are saying nothing, why?
So while the above is happening on a fundamental basis, there is Monetary Inflation- increase in money supply, increase in gov't debt and defecit and a devaluation of the dollar as such. This technical inflation is being offset by the above fundamental deflation.
This bomb will explode when the inflation makes it such that commodities and raw materials sold on the world market become too "expensive" in US dollars to purchase. Manufacturing will grind to a halt.. inventories will disappear because producers won't be able to afford to buy the raw goods needed to make stuff. We won't be able to import finished goods from abroad because our dollars will be worthless....
Really, that just doesn't make any sense at all... So LEH & BSC was hoarding money but somehow went bankrupt? C, AIG, BAC had so much extra cash after all their losses they could give to the Fed to make 2 trillion in policy moves?
I dunno man, thats a stretch
Mark Razer makes a good point that velocity is only measured after the fact. It is murky. But I think Mark might miss that velocity is real (I may not be reading his comment right). When the economy is humming, and people are confident, they spend more and this increases transactions and GDP.
What I am worried about is that when this velocity increases, that is when you will see inflation.
On a completely different track, I think it is even harder to measure since so much dollar linked transactions happen outside of the US now.
Clealy the banks benefit, but how do we? What do we invest in to tak advantage of knowing that this inflation is going to happen?
The pundits that have been screaming that the FED is monetizing the debt (Zero Hedge) need to realize that you can't monetize the debt with the money supply going down. the St Louis Fed has published the definitive description of what "monetizing the debt" really means. You can read it here:
research.stlouisfed.or...
I think the FED balance sheet could double from here and we wouldn't see the hyperinflation all the pundits talk about.
Inflation is when there is an increase in the money supply. The money supply of the entire economy not just an individuals economy.
Deflation is when there is a decrease in the money supply. Again a decrease in the entire economy not just one aspect.
When I hear people talking about delfation they are usually talking about a drag on demand of commodoties. This is devaluation not deflation. Yes as the economy continues to decline at some point people will begin to sell their assets that they cannot afford to hold any longer (houses that the are upside down in or cars they can't make payments on) at fire sale prices. But for there to be genuine deflation these devaluations would have to exceed what the government is printing as well as our debt.
Hyperinflation is coming folks.
Thanks for your patience.
On Sep 03 02:36 PM User 224511 wrote:
> M3 anyone?
(heck I am just being honest)
Regardless of money being printed, lost, balance sheets etc this much I do know:
These costs have gone up and continue to go up every year:
Property Taxes
Food
Electricity (only down recently because of recession but going a lot higher in the future)
Water (the next commodity and this one is going much higher)
Heating Oil (varies but 30 yr trend is up)
Gasoline (varies but 30 yr trend is up)
Cable service
telephone (wireless) - (thru added govt taxes)
Healthcare (10% annual increases for the past 10 years- anyone want to pay my $1500/ month family coverage bill?? Was only $1000 in 2003 and $700 in 1998)
Professional Insurances of all types
Hell even union dues etc etc
So yes there are many many arguments for and against inflation/ deflation, etc.
From my perspective this is does take everyone's eyes off the fact that real inflation for everyday items that matter most to 90% of the population, have been getting worse and worse for decades already.
Here's what you college trained Keynesians don't realize.....
Consumer price inflation or deflation is a direct result of the printing press and asset inflation or deflation is a direct result of credit contraction or expansion. When consumer prices are inflating and asset prices are deflating, you have disinflation. The FED is leveraging monetary inflation against asset deflation to reinflate the asset bubble. They are attempting to do this by using a zero interest rate policy, removing "toxic" assets from the lenders, and liquifying the banks with cheap money. This plan is not obviously working. That's why you still see deflation in asset prices and rising consumer prices. The best way to reinflate the asset bubble is to give consumers the money instead of the banks. The banks are at the bottom of the funnel not the top. They are like the drain in a sink and the consumer is the water. If the water dries up, the drain is sucking air.
> M3 anyone?
Can't get any official numbers on that from the Fed:
www.ny.frb.org/aboutth...
* For decades, the Federal Reserve has published data on the money supply, and for many years the Fed set targets for money supply growth.
* In the past two decades, a number of developments have broken down the relationship between money supply growth and the performance of the U.S. economy.
* In July 2000, the Federal Reserve announced that it was no longer setting target ranges for money supply growth.
* In March 2006, the Board of Governors ceased publishing the M3 monetary aggregate.
You do not need to understand the money issue yourself. You only need to understand that the Chinese understand the money issue and there's a lot of anxiety among the Chinese. They have a gigantic mountain of US dollar assets they really want to get rid of, but lack of good ways of divesting without causing the dollar to collapse. And a lot of other foreigners have the same anxiety. Add to the problem is there are a flood of HOT MONEY flowing to China, through underground tunnels. This create a big headache for the Chinese government as they already have too much US dollars and they surely do NOT want more!
All these US dollars will have to find their way to go home to seek out every bit of physcial assets they can buy. The US market will be flooded with all the dollars, and the land will be ripped bear, as foreigners want to get back their money's worth.
Hyperinflation is coming, like it or not.
I'm with you on the deflation argument, and you made some very good points. I'm not ready to give the Fed the vote of confidence that you are, but it is clear that the net effect of the Fed's policies is not currently inflationary. I think the missing ingredient here for understanding how deflationary things are is credit - and credit is contracting at a rapid pace. Money in our economy is both credit and currency, and whatever effect that printing money is having is being balanced out by a large net decrease in outstanding credit. As we discussed earlier, the complete collapse of the securitization market is putting the squeeze on companies and individuals that want to borrow. Many of the indicators out there are still deflationary (seekingalpha.com/artic...), and until credit turns around, we will be in deflation. Japan did it for decades, and so can we.
> Johnny Oxygen, do you not accept the most common definition of inflation
> - a rise in the overall price level in the economy as measured by
> an index, a basket of goods and services provided in that economy
> (seekingalpha.com/symbo...)?
I'm not sure if you are being facetious, so please forgive me if my sarcasm meter is a little off at the moment, but there is probably a pretty good reason most people's idea of what the inflation rate is varies from the official governmental CPI. It is discussed a little bit here:
www.shadowstats.com/ar...
and the discrepancy between the "old" method of calculating CPI with the "new and improved" version is charted here:
www.shadowstats.com/
But the bottom line for me is that the government has a decided conflict of interest in accurately reporting the level of inflation. Higher reported inflation rates, after all, increase their expenses and hence their deficit and total debt.
For this reason. Something has to cause prices to go higher. This is the old 'prime mover' situation where you trace a problem back to its origin. If someone drinks to much and throws up no one says the definition of 'drunk' is throwing up. No the y definition of drunk is when you drink too much.
I know its a horrible illustration. The point is this. Prices don't just go up as your definition says. Something drives them up. So what drives prices up? Well supply and demand says that the more demand you have you have the more supply you need (to meet the demand...if you want to make the maximum amount of money). It also means that if you have more supply than demand you will have to lower your prices to stay competitive.
This works the same with money. When money is scarce everybody wants it. But when you print 3 trillion dollars out of thin air in just 8 months and shoot that directly into the economy you water down or devalue the currency. This is called inflation because you are 'inflating' the amount of money in the system. A byproduct of that can be higher prices due to the fact that the currency is worth less than before.
On Sep 03 02:56 PM AnnaH wrote:
> Johnny Oxygen, do you not accept the most common definition of inflation
> - a rise in the overall price level in the economy as measured by
> an index, a basket of goods and services provided in that economy
> (seekingalpha.com/symbo...)?
On Sep 03 02:48 PM CC_Gold wrote:
> Here we go again with the deflation and inflation babble.
> Here's what you college trained Keynesians don't realize.....
> Consumer price inflation or deflation is a direct result of the printing
> press and asset inflation or deflation is a direct result of credit
> contraction or expansion. When consumer prices are inflating and
> asset prices are deflating, you have disinflation. The FED is leveraging
> monetary inflation against asset deflation to reinflate the asset
> bubble. They are attempting to do this by using a zero interest rate
> policy, removing "toxic" assets from the lenders, and liquifying
> the banks with cheap money. This plan is not obviously working. That's
> why you still see deflation in asset prices and rising consumer prices.
> The best way to reinflate the asset bubble is to give consumers the
> money instead of the banks. The banks are at the bottom of the funnel
> not the top. They are like the drain in a sink and the consumer is
> the water. If the water dries up, the drain is sucking air.
I have always thought the most common definition of inflation to be some measure of the change in the overall price level in the economy. The most widely watched measure of that is the CPI. I know that measure has various flaws.
I was only wondering if he considered the more accurate inflation indicator to be simply the change in the money supply. I have always thought changes in the money supply could affect inflation, not that changes in the money supply were the definition of inflation.
I tried to make this point about three months ago but you covered it much more elegantly.
What I can't understand, perhaps you can help me out, is that the Fed Balance sheet went up about $1 trillion, yet according to Mark Zandi's report to the Financial Stability Committee in July, the Fed had disbursed $2.7 trillion.
Surely they got some collateral in return which should nominally be worth $2.7 trillion extra on their balance sheet?
There has been no massive increase in the money supply ...
On Sep 03 11:11 AM conceptwizard wrote:
> Government cannot create recovery and wealth. The insistence of the
> fed of massive injections of money and credit only eventually destroys
> wealth and capital. Such devices demand more taxes at a time when
> unemployment is rising, and tax revenues are falling; yet, debt is
> rising exponentially. We have a cadre of elitist banks, Wall Street
> firms, insurance companies and transnational corporations that will
> never be allowed to fail. Each time they use leverage and gamble
> and lose you will get to pay for it, on a never-ending basis. This
> is the heart of corporatist fascism.
Do I understand you correctly?
The crux of the issue is that the money supply includes only funds held by the public.
The Fed pumped funds into the banking system.
The banking system is not the public and the funds held by the banks (banking system reserves) are rightfully not included in the money supply.
So excess reserves, which banks keep on deposit at the Fed, soared.
But that doesn't increase aggregate demand.
The money supply only rises when the banks use these excess reserves to make loans.
This is money and banking 101 and you flunked the class ...
On Sep 03 03:27 PM AnnaH wrote:
> I was not trying to be sarcastic - I'm just curious if Johnny Oxygen
> dismisses the most widely accepted definition of inflation.
> I have always thought the most common definition of inflation to
> be some measure of the change in the overall price level in the economy.
> The most widely watched measure of that is the CPI. I know that measure
> has various flaws.
> I was only wondering if he considered the more accurate inflation
> indicator to be simply the change in the money supply. I have always
> thought changes in the money supply could affect inflation, not that
> changes in the money supply were the definition of inflation.
Lots of government redistribute wealth and income on a massive level without generating inflation. Just look at Europe.
Second of all, stop the nonsense about unfounded mandates.
Discount the future cash flows ....
On Sep 03 04:09 PM Mike Kane wrote:
> while it might be true that the Fed is not printing money 24/7 now,
> we have tens of trillions of dollars in unfunded mandates, and government
> programs that have yet to be paid for...there is only so much money
> to be sucked out of the banking system, until we will need to print
> money or raise taxes. this is why inflation is much more likely
There is no Keynesnian definition of inflation ....
Keynesians and Monetarists both define inflation as a sustained rise in the price level.
We do know that aggregate demand = Money Supply times velocity of money. Good and services are by and large bought with money. Velocity is the average number of transactions that a dollar is involved in over a year.
So inflation either requires a sustained increase in the money supply or a sustained increase in the velocity of money.
On Sep 03 03:23 PM Johnny Oxygen wrote:
> This is really a Keynesian definition of inflation which is basically
> my argument. I tend to side with the Austrian economist on inflation/defaltion
> definitions.
>
> For this reason. Something has to cause prices to go higher. This
> is the old 'prime mover' situation where you trace a problem back
> to its origin. If someone drinks to much and throws up no one says
> the definition of 'drunk' is throwing up. No the y definition of
> drunk is when you drink too much.
>
> I know its a horrible illustration. The point is this. Prices don't
> just go up as your definition says. Something drives them up. So
> what drives prices up? Well supply and demand says that the more
> demand you have you have the more supply you need (to meet the demand...if
> you want to make the maximum amount of money). It also means that
> if you have more supply than demand you will have to lower your prices
> to stay competitive.
>
> This works the same with money. When money is scarce everybody wants
> it. But when you print 3 trillion dollars out of thin air in just
> 8 months and shoot that directly into the economy you water down
> or devalue the currency. This is called inflation because you are
> 'inflating' the amount of money in the system. A byproduct of that
> can be higher prices due to the fact that the currency is worth less
> than before.
Aggregate demand = money supply times velocity of money.
Inflation requires either a sustained increases in the money supply or sustained increases in the velocit of money.
That's a lot more insightful than Republican Party ideological ramblings by the good ol' buys ....
On Sep 03 03:16 PM JeffDB wrote:
> On Sep 03 02:56 PM AnnaH wrote:
We have seen food prices go up like I remember a year and a half ago milk was around $1.80 a gallon and now it's close to $4.00 but the real catastrophic increase hasn't happened yet. I suspect because there is so much misinformation and downright lying going on. That is the problem with looking at the inside of the bladder for answers. You never know what to believe. I don't like to push things on people but if you are really interested in whats going on you may want to see this.
www.chrismartenson.com...
Its a series of streaming videos that really explains things quite clearly without any politics.
On Sep 03 04:09 PM AnnaH wrote:
> Johnny, I think we basically agree. I think the main difference is
> the time factor and when an increase in the money supply shows as
> an increase in the prices of goods and services. If you believe that
> there is a perfect correlation between changes in the money supply
> and price levels (which I believe is reasonable if you allow for
> some adjustment time) then whether you define inflation as a change
> in the money supply or an increase in overall prices in the economy
> doesn't really matter too much unless you want to account for the
> time lag.
> Do I understand you correctly?
1) Asset prices remain deflated and banks turn to zombies (i.e. Japan or a L shaped recovery ) or
2) Asset prices slowly recover and the Fed slowly withdraw the liquidity from the banks (U shaped recovery or new normal).
3) Asset prices shoot up and Fed is forced to withdraw liquidity rapidly and raise interest rates to prevent hyperinflation. (A W shaped double dip recession like in 1974).
Keynesians and Monetarists both define inflation as a sustained rise in the price level. "
The contradiction is glaring...and funny.
On Sep 03 04:19 PM American in Paris wrote:
> Rubbish.
>
> There is no Keynesnian definition of inflation ....
>
> Keynesians and Monetarists both define inflation as a sustained rise
> in the price level.
>
> We do know that aggregate demand = Money Supply times velocity of
> money. Good and services are by and large bought with money. Velocity
> is the average number of transactions that a dollar is involved in
> over a year.
>
> So inflation either requires a sustained increase in the money supply
> or a sustained increase in the velocity of money.
mv = pq. delta p = delta (mv / q).
Positive delta p = price inflation.
Therefore if m increases, v increases, or q decreases, there is inflation.
Wow, I sound smart and said nothing! Like a wannabe French American. You'll do better by forgetting the razor, Old Spice, and soap for a few months.
Unfortunately, there is more to this debate than ad hominem attacks. But not to a Lefty.
On Sep 03 04:24 PM American in Paris wrote:
> You really need to get off the Right Wing train before History Consigns
> You to the Ash Heap ...
>
> Aggregate demand = money supply times velocity of money.
>
> Inflation requires either a sustained increases in the money supply
> or sustained increases in the velocit of money.
>
> That's a lot more insightful than Republican Party ideological ramblings
> by the good ol' buys ....
There is no free lunch when the government prints money.
Until we start going back to a model of saving, we will never become productive again.
Sheesh I gotta stop with these crazy analogies!
On Sep 03 04:35 PM pacalis wrote:
> AnnaH - My guess is Johnny O is assuming the level of goods in an
> economy is relatively fixed, as is demand. My understanding is that
> this is an unstated assumption in the CPI. In theory CPI has a fixed
> basket of representative goods and measures of CPI should aggregate
> to a macro-economic level. So in short, in theory both definitions
> has similar assumptions and should lead to the same result. However,
> empirically, money supply data should be more robust than CPI because
> money supply IS a system measure whereas CPI samples on a "representative"
> bundle of goods.
On Sep 03 11:23 AM John Nelson wrote:
> Excellent article. My concern is that the Fed has used those excess
> deposits to increase velocity mostly in the mortgage sector which
> has required them to increase the duration of their asset portfolio.
> I think that the Fed and the GSEs artificially loosened underwriting
> for mortgages in order to avoid a meltdown (which I think they had
> to do), but it does leave the Fed with longer dated assets. I'm not
> sure how important that is. Do you think it matters if the increased
> velocity is primarily just absorbing the housing bust?
1.) You need an entity that is willing to print excess currency.
2.) You need the currency to be irredeemable i.e. backed by nothing and good faith doesn't count.
3.) A debt burden that continuously rises.
4.) A carry trade on that currency due to near zero interest rates.
5.) FOREX Vigilantes foreign and domestic.
6.) A government sponsored devaluation event is usually the straw that breaks the proverbial camel's back.
2.) The US Federal Reserve electronically prints money for free and buys the bonds at auction.
3.) The FED charges the taxpayer the interest on those bonds that they bought for free.
4.) They "lend" those same bonds to the banks to be placed on their balance sheets to make them appear solvent.
5.) The banks aren't allowed to fractionally lend against those bonds.
6. The banks were liquified with these bonds because they didin't have enough capital or assets and would of been taken over by the FDIC because they were insolvent.
Again, I make my case: The Fed breaks your legs. Then the Fed hands you a pair of crutches and says "See? If it weren't for me, you wouldn't be able to walk!"
That's why the Non-Federal Reserve doesn't want to audited. They claim it's a state secret.
Also, how is the FED expanding its balance sheet. What cash are they using to purchase the assets?
There needs to be some evaluation of what the money is doing. If banks are socking it away to decrease leverage and build up capital to provide for expected losses this has to be a major deflationary pressure. We are looking at a major decrease in the infamous multiplier effect that torques off anyone who hates fractional reserve banking. After all what fueled a lot of the bubble? Just look at the rate of sub prime mortgage issuance rate did in 2006 when the guvmint relaxed reserve requirements for large investment banks. Consumers are likewise deleveraging their balance sheets with decreased consumption and increased savings.
Who has this newly printed money? Is it available to be spent? Consumers don't have it. They are dealing with massive unemployment and crushing debt. Businesses don't have it, their profits are in the dumps. State governments don't have it, they are facing plummeting tax revenues and crushing debt. The only new money that is being circulated is the Federal deficit spending, and that hardly makes up for the losses in the other sectors of the economy.
A flat statement like inflation is simply an increase in supply of money has to have some qualification to it. It isn't that simple. And this supply isn't effectively measured by M1, M2 or M3.
The Fed did not entice banks to deposit their existing cash on reserve at the Fed. The Fed really did print the 1 trillion+ dollars and then used a combination of instruments to place this out in the marketplace (TAF, TALF, buying commercial paper, buying treasuries, buying agency debt and CMBS ...).
Once the Fed has given the newly printed cash to the banks in exchange for their assets as collateral, the banks have then taken this cash from the Fed and have left it on deposit as excess reserves.
Remember, the Fed has been trying to *increase liquidity*. If the banks were simply leaving existing cash on reserve at the Fed, this would have decreased liquidity (removed cash from the system).
For those interested, John Mason, a former economist at the Fed, has a post that touches on this very subject: maseportfolio.blogspot...
On Sep 03 06:55 PM CC_Gold wrote:
> Celcius -
> That's why the Non-Federal Reserve doesn't want to audited. They
> claim it's a state secret.
I'm sure most of you noticed the price of Gold is near 1,000. I'm not saying buy it but something is not quite right. Whenever Gold start getting near a Grand, something is about to go up in smoke. Any ideas....I heard the reason why, but i don't really want to say quite yet.
en.wikipedia.org/wiki/...
The act of ex nihilo disgusts me, since they are creating something of value and purchasing something of value - US treasuries or toxic assets. The toxic assets are probably worthless, but ultimately they have an asset. At some point though they will have to reverse the process and remove the excess capital from the market. I wonder how much the FED earns from the ex nihilo QE process.
It does not deal with the fact that existing Fed policy is unable to take enough QE out of the economy:
1. without crippling the housing market recovery (interest rates must rise if money supply shrinks),
2. holding money velocity down when/if a recovery starts. (the interest payments on deposits are not a palliative for all seasons.)
3. Imposing discipline on Congressional/Administ... future spending is absolutely beyond the Fed's policy reach.
So far, so good; but what do you do when spending continues to roar out of control? Hyperinflation is a proper and timely concern of all rational citizens of the USA.
Couple thoughts...
One is Chinese leaders are telling their citizens to buy gold: www.mineweb.com/minewe...
The second is simply traders doing what they do best, working a sector for profit.
The dollar index isn't cracking, so it's not the dollar falling of late that's causing gold to rise. Yes, there are 84 or so banks that are underwater and more on the way, but that's not causing any real panic yet. The stock market isn't crashing causing investors to run to safety. The treasuries are holding their own.
I'd have to say it's just big money right now playing with the yellow metal.
JMHO...
Federal Deficit will be a record $1.6 trillion in 2009 and the White House estimates another $9 trillion between 2010 and 2019....U.S would need debt at one point of time to service their existing debt...
All this surely inflationary in the long run...maybe in the next one year or so we will have a phase of deflation or very moderate inflation...
On Sep 03 03:08 PM Between The Numbers wrote:
> Mark,
> I'm with you on the deflation argument, and you made some very good
> points. I'm not ready to give the Fed the vote of confidence that
> you are, but it is clear that the net effect of the Fed's policies
> is not currently inflationary. I think the missing ingredient here
> for understanding how deflationary things are is credit - and credit
> is contracting at a rapid pace. Money in our economy is both credit
> and currency, and whatever effect that printing money is having is
> being balanced out by a large net decrease in outstanding credit.
> As we discussed earlier, the complete collapse of the securitization
> market is putting the squeeze on companies and individuals that want
> to borrow. Many of the indicators out there are still deflationary
> (seekingalpha.com/artic...),
> and until credit turns around, we will be in deflation. Japan did
> it for decades, and so can we.
The reality is that while everybody has been debating a rather esoteric "solvency" issue, based on somewhat fictitious mark-to-market asset values, rather than discounted-cashflow values based on actual debt performance, banks have been amassing a huge hoard of cash, alltime record levels, in fact. In what would surpise many, bank cash flows and balances have been rapidly expanding for many quarters, now.
This, precisely, is the looming potential to fuel inflation, the vast bank liquidity that can flow quickly back into the system as conditions improve. Only if the Fed raises capital requirements substantially, or otherwise retrieves its largesse, will the economy be spared a large infusion of unearned, printed capital, which necessarily seeking the same amount of good and services --or even less with production cutbacks-- will be inflationary.
On Sep 03 01:43 PM tunaman4u2 wrote:
> Bank failures were imminent Nov - Dec due to poor capitalization...
> and now I'm supposed to believe that these banks had "Excess money
> they were hoarding" and they gave it to the Fed so the Fed could
> put it to work?
>
> Really, that just doesn't make any sense at all... So LEH & BSC
> was hoarding money but somehow went bankrupt? C, AIG, BAC had so
> much extra cash after all their losses they could give to the Fed
> to make 2 trillion in policy moves?
>
> I dunno man, thats a stretch
> ... you don't understand that the definition of inflation
> is an increase in the money supply. Higher prices are a symptom of
> inflation not a definition.
Johnny O, you are the one who doesn't understand and you have it exactly backwards. The Wikipedia entry on inflation begins:
"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time."
Any first year econ textbook will say the same thing.
The issue is not whether the Fed printed a lot of money, or increased the velocity of money. The issue is whether the
increase by the Fed is greater than the decrease by the private
sector.
Any discussion of the inflationary impact of Fed activity
is just blowing smoke if you don't consider the other end of the
seesaw. It's all about balance. About 98% of the blatherskite
about the risk of inflation, on SeekingAlpha and elsewhere,
only compares Fed money creation to earlier time periods.
That is nonsense. What you have to compare to is the other
money creation/destruction processes going on in the same
time period. Very few writers understand this -- and looking at the rubbish in the comments on this article, very few readers get it either.
/jg
You're partially correct, but go back to Monday and see why the markets had a sell-off. There was panic on the trading floor because there was indications that a foreign government was going to default on their otc commodity derivatives contracts. This default would essentially bankrupt the three largest U.S. banks. This same government is seeking all 400 tons of IMF gold. If they do default on these contracts, it would ignite the derivatives death star and over 1 quadrillion of non-existent money would be unwound. The trade-off is simple. Give them the gold or they will launch the first salvo that will topple the whole otc derivatives ponzi scheme. It's the commies vs the crooked banksters. Who will win. You are all about to find out. Stay tuned. The current run to gold is a sheer panic move because in the end - paper is still paper.
The point of the FED buying Crappy Mortgage Assets (CMAs) was to help liquidity at the banks. It basicallly allowed the banks to sell for Par what there was no market for. WHo knows what the Fed paid.. we may never know.
On Sep 03 07:22 PM kylesch wrote:
> This author is making false claims. I really urge him to update this
> article with correct facts once he has taken time to review the Fed
> statistics.
>
> The Fed did not entice banks to deposit their existing cash on reserve
> at the Fed. The Fed really did print the 1 trillion+ dollars and
> then used a combination of instruments to place this out in the marketplace
> (TAF, TALF, buying commercial paper, buying treasuries, buying agency
> debt and CMBS ...).
>
> Once the Fed has given the newly printed cash to the banks in exchange
> for their assets as collateral, the banks have then taken this cash
> from the Fed and have left it on deposit as excess reserves.
>
> Remember, the Fed has been trying to *increase liquidity*. If the
> banks were simply leaving existing cash on reserve at the Fed, this
> would have decreased liquidity (removed cash from the system).<br/>
>
> I can't believe nobody has called the author out on this yet ...
> It's quite a misrepresentation of the truth.
>
> For those interested, John Mason, a former economist at the Fed,
> has a post that touches on this very subject: maseportfolio.blogspot...
I see a light at the end of the tunnel...
It is GREEN.
Oh SHOOT!
If we had enough jobs,we wouldn't be having this conversation.....We don't even make our own shoes and underwear anymore.
In any event, I will point out some of your quotes with my personal opinions of them.
I take it that you are gauging inflation on the price index. That is a dangerous argument, but feel free to pitch it. Bernanke does. I doubt it if many on this site will buy it. We know that the Fed has printed a ridiculous amount of money. I am confident that that is what most of these readers will use as their impression of whether inflation is, in fact, taking place. Inflation of the price index is not occurring, since consumers are questioning their drunken sailor spending, now. Inflation (inflated money supply)+ deflation (lack of consumer spending)= a stable price index (an irrelevant statistic in these times).
It suits the banks to keep the price index low, for now. It appears that they just invested their bailouts in the stock market to continue the smoke and mirrors picture. They are not loaning that money the Fed printed for them.
“By recycling existing excess cash, the Federal Reserve stopped the negative effects of cash hoarding and pulled the U.S. out of a full scale depression.” Yeah, right, and I bet you believe there were weapons of mass destruction in Iraq, too.
You said, “In a simple closed economy, annual GDP must equal (a) the amount of money multiplied by (b) the number of times money turns over in a year.” To which I reply, try economics classes.
You said, “Bernanke and his staff were brilliant when they figured out how to stabilize GDP by forcing the velocity of money to stabilize and start to rise.” To that, I say that I think I am going to puke.
You said, “Pundits who question whether or not the Fed has the courage to reverse course and pull out monetary stimulus as the economy recovers need to look at actual data.” Hmm, I guessed I missed your “actual data”. I think that arguing the Fed’s courage is like arguing whether a zebra has stripes. I never heard that the problem with the Fed was that it lacked courage.
In fact, we can’t stand the fact that the Fed is totally independent of Congress which is bad enough. However, when you couple that with the fact that Congress is independent of the American people, their smoke and mirrors that you tout here are irrelevant. Perhaps, though, you have seen that Fed audit we all are pushing for…
That isn't what the Fed was hoping. Low interest rates were supposed to have a stimulus effect. Cash-for-trash was supposed to save the banks AND get lending moving again, so that the consumer could spend again and the economy could grow again. The problem was that there was no one to lend to -- the consumer was already maxed out. That is why we are experiencing deflation, or something close to it.
For the Fed to meaningfully expand the money supply under these conditions would demand a truly massive increase in the monetary base. That will only happen (and it WILL happen) when no one else is willing or able to purchase treasury bonds any more to fund deficit spending. How long will that take? It depends how long China et al are willing to keep playing along. Mathematically speaking, it could continue quite a long time -- to the point where we need to borrow even to pay the interest on debt. But I think the game will be up long before then.
On Sep 03 01:14 PM Dumb Question wrote:
> I am not sure of the mechanics, but I don't beleive the author does
> either. Is this right?
>
> Step 1. When the FED buys Crappy Mortgage Asset (seekingalpha.com/symbo...)
> from DUMB BANK, The FEDs assets go up and the DUMB BANKs cash goes
> up. To get the money to pay for the CMA, the FED sells bonds, or
> shorts bonds, but in essence the FED borrows. The result is the CMA
> goes to the asset side and the shorted bond to the liability side.
> (this in essence increases the debt/equity leverage ratio of the
> FED which is not regulated, or audited.)
>
> Step 2. The DUMB BANK now has cash. DUMB BANK doest not like that.
> They make money by lending, so they lend it to new dumb mortages,
> credit cards, other banks or back to the Fed. If it becomes a loan,
> than it appears that nothing happens, but in reality, this loan (cash)
> becomes a deposit at STUPID BANK.
>
> Step 3. If STUPID BANK takes in a deposit, STUPID BANK is required
> to put a reserve back to the FED. In the STUPID BANK did not earn
> interest. This reserve requirement was required so STUPID BANK could
> access the Fed window in an emergency. The reserve requirement is
> based on the riskiness of their loan book, but lets call it 8%.
>
>
> Step 4. STUPID BANK takes in a deposit, and then puts the 8% reserve
> on deposit at the FED. The rest of the cash recycles to new loans.
> And so on and so on.... Loans become deposits, deposits require reseerves,
> new deposits become loans etc. After 12-15 transactions of the banks
> have recycled the money. The FED borrows the treasury bond, buys
> the CMA, and then after 12-15 transactions, the FED has gotten in
> all of it intial purchase price of the CMA in the back door as reserve
> requirements.
>
> COMMENT: What Bernake did when he "persuading Congress to pass a
> law that allows the Federal Reserve to pay interest on cash deposits
> at the Federal Reserve," Bernake INCREASED the profits of STUPD BANK
> and DUMB BANK, and decreased the profits of the FED.
>
> Step 5: When the FED now goes to sell the CMA or it matures, the
> FED will take in cash and pay off its loan or shorted Treasury Bond.
>
>
> However, the money is still out there.
>
> Only after 8 -12 banking transactions will you see inflation. <br/>
>
> Is that right?
>
> Am I right?
>
> Or is the author right?
>
>
>
>
>
>
This "nonsense" is sending Michigan back into the red for the 5th time in 6 years. They raised taxes, destroy jobs/wealth, gift to the unions & special interests and AMAZINGLY they are negative again. Their solution? Spend more and raise taxes/fees /punishments AGAIN. Didn't work the first 5 times, I'm sure the 6th is the charm.
One of the biggest reasons we keep having budget issues are off-balance sheet liabilities and unfunded mandates from DC.
DC is doing the same thing at a record pace.
So, for today, scream nonsense, in the next decade as any wealth you are accumulating now is stolen from you and gifted to everyone else, then will it still be nonsense?
On Sep 03 04:15 PM American in Paris wrote:
> That doesn't make any sense at all.
>
> Lots of government redistribute wealth and income on a massive level
> without generating inflation. Just look at Europe.
>
> Second of all, stop the nonsense about unfounded mandates.
>
> Discount the future cash flows ....
Tax dollars were not used to increase the size of the FED balance sheet. How do you suppose that these toxic assets were paid for? The FED didn't borrow the money to do this either.
Furthermore, you failed to mention what effect the FED's new policy to print money to pay for Treasuries will have upon the currency. The last country to do this was Zimbabwe, and they had to abandon their currency after printing million dollar notes so people could buy bread. Now the currency is sold on ebay as a collector’s item.
www.google.com/search?...
www.google.com/search?...
WELL INFORMED; SOME BACKGROUND. Thank you Mark for putting a bit of Sunshine on this major concern. Too much of the process is treated like the (now proverbial) mushroom: Left in the Dark and fed plenty of (well...) ferilizer.
Eventually, something gives. As it does, there will be price inflation in raw materials, especially those that aren't substituted, further price deflation in labor and assets, and further economic angst. Each side (inflationistas and deflationists) will look at specific cases and squeel about Fed policy.
The question you really need to ask yourself- outside of if one or two trillion of Fed stimulus is going to offset $20 Trillion of lost credit (hmm, that would be a no, especially if the Fed increases short term rates) is how substitutable are gold, oil, iron, copper, lumber, and grain?
Gold is not the only source of money or beauty (though it is for the gold bugs, so it should rise), oil is not the only source of energy (especially at $100/barrel, but that will take time, so it should rise), iron is not the only source of steel (we will recycle more steel from cars than use it this year), copper is not the only source of connection (copper-coated aluminum or wireless, anyone?), lumber is not the only source of housing (lots and lots of commerical real estate will be converted to housing), and grain is not the only source of food (if technology, Africa, and former Soviet states step up, this is one area where we could see deflation). Meanwhile, labor-intense services (healthcare, entertainment, beauty, legal, reporting, education) should see relative price decreases. How much does it cost to download a song or read a news article today?
So, there will be some inflation- which will be a good thing, because it will mean there is demand on a global scale and the three billion people living on less than $2.50 a day may have a chance at a better lifestyle. And there will be deflation as well, because there are a couple billion more low cost workers looking to get in on the action. Increasing the global money supply to account for all this new economic activity is a reasonable approach.
"Yep, Mr. Wolf, the henhouse is just fine," said Mr. Fox.
Wake up. The criteria used to compile the stats changed under Clinton. We are being fed BS and "debunking" a validly put together summation (by Shadowstats) with the same agency defending their own lies is insanity at its finest.
On Sep 03 04:26 PM American in Paris wrote:
> I hate to spoil your party. But the urban legend shadow statistics
> was debunked by the Bureau of Labor Statistices some time ago ...
> There is a nice paper you can pull off their web site.
City of Toronto has slapped a $8500 tax levy on any home bought and additional $65 tax on any auto renwe yearly sticker--these hidden taxes--are killing us in Canada.
I suggest Mark take a closer look and do some shopping on his own and stop being a shill for the Money Changers.
Admit it,It's a mess. A suggestion for Mark, how about you writing an article in where does America(like a drunken sailor) get $billions to give countries all over the world and not pass it on to the tax payers :^/
(www.nytimes.com/2009/0...), then we could all have a reasonable and INFORMED conversation.
Was that old money money that was created prior to the 1913 Federal Reserve Act? If not, then that 'old money' was money created out of thin air via the Fractional Reserve System of banking.
When China and India et. al. get more wealthy, there is a benefit to the US that we are in fact feeling: they now have the ability and indeed the desire to lend us money, as companies, banks and countries. This is new leverage, and an absolute gain in global prosperity. How we deal with it is challenging - how we account for a new creditor, etc. in our popular zeitgeist, but there is no doubt that it is a good thing, economically speaking, if we can agree that reducing global poverty through free trade / free market principles is a good thing.
Of course, global trade has always been important, but never THIS important. I'm pretty sure that we're not yet in a position to fully comprehend all of the implications yet, and if we're not, the you can be sure that our business partners in the rest of the world are having a rough time, too.
Is there an online article that I can read about the panic that took place on Monday? Thanks in advance!
B
On Sep 04 02:02 AM CC_Gold wrote:
> Buy Gold-
>
> You're partially correct, but go back to Monday and see why the markets
> had a sell-off. There was panic on the trading floor because there
> was indications that a foreign government was going to default on
> their otc commodity derivatives contracts. This default would essentially
> bankrupt the three largest U.S. banks. This same government is seeking
> all 400 tons of IMF gold. If they do default on these contracts,
> it would ignite the derivatives death star and over 1 quadrillion
> of non-existent money would be unwound. The trade-off is simple.
> Give them the gold or they will launch the first salvo that will
> topple the whole otc derivatives ponzi scheme. It's the commies
> vs the crooked banksters. Who will win. You are all about to find
> out. Stay tuned. The current run to gold is a sheer panic move
> because in the end - paper is still paper.
Have you tried to get a mortgage recently??? The loosening was done by the previous administration, when the housing bubble was built up sky high. Now its almost impossible even for well qualified buyers to get a mortgage, without jumping thru hoops.
On Sep 03 11:23 AM John Nelson wrote:
> Excellent article. My concern is that the Fed has used those excess
> deposits to increase velocity mostly in the mortgage sector which
> has required them to increase the duration of their asset portfolio.
> I think that the Fed and the GSEs artificially loosened underwriting
> for mortgages in order to avoid a meltdown (which I think they had
> to do), but it does leave the Fed with longer dated assets. I'm
> not sure how important that is. Do you think it matters if the increased
> velocity is primarily just absorbing the housing bust?
Hyper-inflation is a loss of faith in a currency where other nations won't accept your currency for the things you need. Since a business may need to buy things from other nations, it too, won't want your money but, will want to sell you their goods in something that has enough value that lasts long enough to get new raw materials.
In Zimbabwe, a Big Mac went from a few Zimbabwe dollars to over $2.5 million. If you have to import the products you sell, you have to have enough money or a substitute that the seller in those other countries will accept.
While high inflation normally precedes hyper-inflation and in all likelihood will here, hyper inflation has to be viewed as a totally different situation than just "higher inflation." It is the loss of faith in our currency and high inflation doesn't necessarily mean that has happened.
However, with so many nations moving away from the dollar and making non-dollar trade deals, China telling its citizens to buy gold and silver, China, India, Russia and Brazil buying IMF bonds to get rid of dollars, and global shopping with dollars for mines, oil fields, agricultural lands, etc. you have to know the dollar is on borrowed time.
It could be months or a few years but, the trends are all in place to collapse the dollar externally and internally as long as we try to keep borrowing more than the world is willing to lend us.
We can be in the middle of a depression and have no demand for anything but food and still have hyper-inflation. We import so many things, including a lot of food items that once the dollar starts heading down to hyper-inflation territory, we will all be amazed at the speed it happens.
Nation after nation would stop accepting the dollar. Our troops would have to come home and be added to the unemployed. Our defense industries would shut down and add their employees to the unemployed.
Zucor and Lipitor that we import from Ireland would cost thousands of dollars a pill. Rubber gloves that we get from Malaysia and China, likewise, would cost thousands of dollars a box if they would even sell them to us for any amount of dollars.
High inflation?
That may come if there is a global recovery and nations are still lending to us. The global demand for food, energy, raw materials will determine our prices, not our demand. While asset prices and wages may be falling here, a global recovery will push those prices up globally. As that happens, higher copper, oil and other prices will mean that any good shipped to us will be higher in price regardless of our demand. It will have to include all their rising costs in the price in order for them to justify the sale of it to us.
Again, that too, may not happen if the global recovery they are saying is going on, is an illusion. If it isn't an illusion it may be months or well into next year, before the recovery is to a point we see high inflation as the dollar continues to weaken.
We may see some short term relief as the dollar may rally and drive oil and commodity prices down, but, I have yet to hear any of the analysts on Asian news or Australian news say it will stay up.
The U.S., the FED, the Government, the President, is no longer in control of our destiny. It lies in the hands of the nations holding trillions of our dollars and debt. We have all seen how they have been moving from bonds to notes and bills. The government says, "see they are still buying our debt," but you better believe that the type of debt is just as important as the term attached.
They can let those 6 month notes just mature when they need more dollars to buy more gold, oil, or copper and not replace it. We are now forced to roll trillions of debt over annually. This is becoming critical and due to the short terms, any time the FED does have to start raising rates, the CBO says it will quadruple the interest on debt as deficit spending continues over the next ten years at the same time interest on debt is going up.
AND, that is provided we can even get the foreign nations to keep lending.
Any author that talks about hyper- or high inflation and doesn't include debt, foreign lenders, and our high import levels is missing much of what will influence our prices.
You know, it's interesting how different the inflation metrics are when measured by business-oriented research firms, like ECRI, versus the BLS and its fraudulent CPI (redesigned in 1993 to systematically erode transfer payments and government debt service.) I know where I'd put my money.
<<The Economic Cycle Research Institute's U.S. Future
Inflation Gauge (USFIG), designed to anticipate cyclical swings
in the rate of inflation, rose to 89.6 in August from 84.6 in
July.
The index has now risen from a 51-year low in March to a
ten-month high, said Lakshman Achuthan, managing director at
ECRI.
"Thus, the risk of deflation has clearly dissipated for
now, but inflation is not yet a clear and present danger," he
said.
The July USFIG annualized growth rate, which smoothes out
monthly fluctuations, shot higher to 6.5 percent from negative
8.8 percent in July, revised from negative 8.6 percent.
The gauge was pushed higher by rising commodity prices,
said Achuthan.>>
Think of it this way, a hedgie makes a few hundred million in 2008, that money didn't come out of the ether, but came by way of a collective loss on the investment he gained from. This "hoarding" of money has little to no velocity since this person has most likely already satisfied all his needs and wants. The corresponding loss affects velocity because those individuals (pensioners, small investors) have a much much higher propensity to spend.
On Sep 03 11:18 AM markfl wrote:
> While the author suggests some intriguing points, Mr. Hansen posted
> an article today with a revealing chart showing the velocity of money
> over the last several years: "Velocity of money is continuing its
> downward trend which began in 4Q 2007. Some believe we are experiencing
> deflation. For sure, there is no apparent inflationary pressure."
> seekingalpha.com/artic...
>
>
> So it seems that while inflation may be temporarily restrained, the
> velocity paradox is a potentially serious threat to sustained economic
> growth.
Let’s put the pieces together here. Just this past weekend China announced that State Owned Enterprises (SOEs) will be allowed to default on commodity derivative contracts. Think of that. China has given the green light and authorized the defaulting on commodity derivative contracts.
This story broke over the weekend but has not gotten much mainstream media attention on this side of the pond. (North America). The only inference to it was the talk or “buzz” on the Wall Street floor that another bank was rumored to be close to defaulting. As Art Cashin of UBS Securities indicated in the video clip I posted earlier, normally when a market sells off on a rumor and the rumor turns out to be false, the market will tend to correct itself. IT DIDN’T.
The Reuters report cited 6 foreign banks that received letters indicating that the Chinese State Owned Enterprises would be given the green light to default on their derivatives.
A look at what a derivative actually is may be useful here. A Derivative is a financial instrument that is derived from some other underlying asset, index, event, value or condition. Rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date. Commercial and investment banks make up the foundation of the over the counter (OTC) derivatives market. Investors use derivatives to protect against risks, such as sudden changes in price or value of the underlying asset. Others tap derivatives to take on extra risk, in the hope of extra gains.
Well China owns billions of these products and it has finally come to light they have had enough of having the value of their derivatives manipulated by the manipulation of the price of the underlying asset. They have finally woken up to the fact that these derivatives have been bundled together like junk in a manner that resembles the mortgage backed derivatives that brought down the world markets last year.
Back to Reuters. Some of the State Owned Enterprises that stated their potential intentions to default were Air China. China Eastern and Cosco. Mainly in part because they took major derivatives losses over the past year but also, concerns are arising that the derivatives that they were sold by these foreign institutions are garbage, underwater and may never see the light of day. So why continue to pay for them? So the concern in the financial world is that holders of these losing products may just walk away, not unlike a home owner with a $600,000 mortgage on a home valued at $475,000 deciding to just hand in their keys. However, read on...this has nothing to do with morgtgage backed products. This time, the concern may be over Oil.
They (Reuters) cited 6 foreign banks.Where the story gets really intriguing is that among the major derivatives providers according to Reuters but also widely known in the industry, are Goldman Sachs, UBS and JP Morgan.
Here is the looming problem. These products are worth billions. One report that a good friend of mine did showed that if Goldman Sachs for example were to take this one up the rear, they could stand to lose 15 billion dollars. (This number is by no means confirmed)
An important history lesson is needed here. “Potential default” was the concern that sparked and prompted the most recent economic crisis. These intricately weaved products along with highly speculative CDOs and CDSs began to fall apart when the bubble that was in large part significantly contributed to and created by the financial institutions that were packaging this junk started to fall apart.
Imagine the impact for a brief moment if you will, on the impact to the financial landscape if China were to say “we are walking away” from those products. I would imagine that China, being the biggest purchaser of US debt, could surely collapse the US institutions that were at one point deemed too big to fail if they decide to go ahead with this plan.
This is why I don’t take tonight’s news that China purchased 50 billion dollars of IMF bonds lightly. In fact, I take it very seriously. This is why I take the buzz on the floor over the past two days very seriously as well as I do the incredible spike in Gold today. Most importantly, I do not take lightly the recent 25% correction we have seen in the Chinese Stock Market. Can all these events be interconnected some how? Is the Chinese stock collapse giving us a hint?
The Reuters story came out on Mon Aug 31, 2009 at 7:42am EDT. I find it quite interesting that the mainstream media did not take this more seriously. Reuters reported that the above noted Chinese companies have already issued letters to the banks. The Reuters article cites 4 clear points.
Is there going to be some inflation? Sure. Maybe someday in the next 5 years a can of Coke will cost $3 or so, but (let's repeat today's lessen!) hyperinflation (ala Zimbabwe / Weimar) for USD isn't gonna happen.
For hyperinflation, that can of Coke will have to cost around $150,000!
Stop tossing around the term "hyperinflation" and instead use the correct terminology - prolonged period of high inflation.
If anyone really believes hyperinflation will occur ala Weimer or Zimbabwe, then you better have:
(1) Lots of guns & ammo
(2) Basement vault full of actual gold
(3) Lots of MREs and canned foodstuff or live on farmland with livestock
(4) Stockpiles of gasoline and fresh water
'Cause if hyperinflation takes hold in the US, the entire basic social structure of the country will cease to exist and it will be a full on revolt, uprising, whatever you want to call it.
Shakespeare said it would start by killing all the lawyers. If hyperinflation comes to pass, it will be the bankers followed quickly by the politicians.
Let's recap that fact- Hyperinflation (ala Zimbabwe / Weimar) for USD isn't gonna happen and the US will go to war with China before hyperinflation ala Zimbabwe / Weimar takes place.
$.02
#2 The Fed is NOT a government agency ... it is a privately held corporation which has been GIVEN the authority to control all the money (legal tender) in our nation. The Fed does NOT print money. They contract out that duty to the US Mint, which IS a government agency.
#3 Therefore the US Governement does NOT print money for themselves ... the US Mint prints it (for a small fee) for the Fed. When the US Governement needs money they have only 2 ways of getting it; a) they tax people, companies, activities, etc. and/or b) they borrow it from people, nations, etc.
If we could ever abolish the Fed and have our own governement print the money it needs and then distribute that money via jobs such as roads, railways, science, research, military, etc. then the private economy would boom ... the money would be released WITHOUT THE BURDEN OF DEBT ... and would be recycled time and time and time again ... putting us in the situation that RRegan did so successfully ... decreased tax burdens increase tax revenues! This would decrease the need for the Fed Government to print more money and thereby keep inflation LOW on a permanent basis and not be as susceptible to the swings we see in the past 50 years.
JMHO
I had no idea I was hoarding my own money and should had been keeping in on deposit at the Fed.
"what the Fed detractors neglect to mention is that the Federal Reserve didn’t print money to pay for the purchase of its new assets but rather sucked money out of the banking system that was being hoarded by banks, corporations and individuals."
You obviously do NOT understand the Fed's balance sheet or the forces driving it. And your comments regarding the Fed's courage and skill indicates you don't understand what got us into the mess and the nature of the political beast. Please invest accordingly so you can join the huddled masses in the soup line.
Now the money received by the maker of the car, the home (or home owner) or travel providers is money that does not represent debt they owe, but the debt owed by their customer. This received money ends up in bank accounts or as cash on hand that is spent or re-spent. The original debt creation can have a multiplier effect of up to five times its original value, according to the dismal science of economics.
At this point the debt-based dollar represents energy. The energy it took to build a home, including the sum total of all the energy it took to create the components of the home plus the energy to ship it, handle, assemble it.
But that original creation of debt by a borrower will have to be paid by the borrower from the energy expended in future years. So that debt dollar is ultimately not backed up by the asset collateral or service exchanged for the debt credit, but by the energy of the borrower to pay back the debt, plus interest. )Take away that future energy repayment and the value of the collateral collapses)
As the principal is paid off, money (debt) is expunged from the books of the money issuer, the banks, but the banks get to keep and spend the interest received on the original debt credit.
Of course, eventually the banks would suck up all the credits (money) as the original money (debt credit) is paid off, or destroyed. To offset this flaw in the system, the Federal Reserve continuously issues excess money (Congress does not print or issue money as called for by the Constitution, only the privately owned banks and privately owned Federal Reserve do. If you challenge that, then why does the government borrow money and not issue it directly as Russia reportedly does?).
How does this relate to hyperinflation?
Massive amounts of original debt credit issue created by the financial system for the purchase of homes was backed by debt originators (borrowers) who would not be able to pay back the debt. It has also been alleged that massive amounts of mortgage debt and related derivative asset bets were not even backed by actual property, much less an actual borrower.
Much of the recent debt - money created by the privately owned Fed - using the ruse of having Congressional backing - was used to simply fill the black hole caused by the collapse of debt credit that would never be repaid by the original orignator-borrower.
So the skeptics on this board are correct in saying not as much new debt-money was created since it simply replaced debt-money which had, in effect, vaporzied due to obvious non-payback because the borrowers would be unable to pay back the debt plus the vast overpayment representing compounded interest due.
We had serious inflation problems back in the 1970s because the Federal Reserve printed massive amounts of money debt so the government could finance both its Great Society and its Great Conflict against communism in Vietnam (a UN peacekeeping action that under UN protocols called for daily battle plans to be signed off on by communist Russian generals). At the same time, there was no massive destruction of money, thus money supply inflated.
To offset this inflation, the Federal Reserve jacked up interest rates to kill inflation, but as two economists wrote long ago in the Wall Street Journal, this might have fueled inflation further as businesses simply raised prices to handle higher interest costs. In response, the Fed printed money so the public had more dollars on hand to pay back principal plus debt.
In 2008 the federal government was borrowing money to finance its current Compassionate Conservativism programs plus fight dubious wars on two fronts while also spending on a massive array of deficit loss leaders from subsidizing Israel (to combat an Isllam that is a morality threat but not an economic or military threat) while ignoring the Chinese expansion into Africa and our own western Hemisphere) to energy and housing stimulus programs. It was also spending on current operations and program staffing, plus rising retirement and senior health care programs.
It should be apparent that the aging population and the destruction of the democgraphic effects of more than 40 million abortions makes it difficult for the future energy of this nation to pay off the accumulated debt of the nation, both consumer and public.
The ability to pay back this debt - and to simultaneously consume new homes and cars and travel seems shaky.
Thus money will deflate, as it did during the Great Depression.
If the federal government does not repudiate this debt, as consumers and businesses are doing through foreclosures and bankruptcy,, it wil have to pay off the debt with hyper inflated useless dollars.
In essence, some of this has already happened when the Fed created credit debt to fill the black hole from the mortgage collapse.
But how will it transfer hyper inflated credit debt to China and foreign and domestic federal debt holders ? That is the unanswered question.
Florida government is already raising taxes on citizens to fill its black hole. This will leave less money in citizen hands to push up the cost of goods and services.
The federal governmenet has already announced it will not stimulate domestic spending by giving retirees more money to spend. Retiree transfer payments have been frozen. That is deflationary.
Any hyper inflated dollars transferred to China, Japan and other domestic and foreign debt holders will create a flood of dollars, but how will China logistically spend those hyper inflated dollars?
If they transfer those hyper dollars to their own citizens, the Chinese will have to ultimatel;y buy U. S. products or assets in U. S. denominated debt credit as those U. S. credit dollars are repatriated home. Ecnomists have always said U. S. dollars sent overseas eventually have to come home.
If Chinese and foreign debt holders start to exchange their dollars for U. S. property or businesses - that will simply transfer our holdings to them at distressed prices. We are now more of a sevice economy and the foreigners will have to travel here to consumer our sevices for the credit dollars they have accumulated.
This is really getting complicated - how this will all play out. How much easier it would be to just return to the economics of the Renaissance when there was no usury debt. Only this time the kings should be forbidden from borrowing from foreign banks to fund their empirical dreams. Every king who has done so has ruined his kingdom.
So for now we have deflation. We could have hyperinflation, but the money system engineers still have to engineer just how that can be accomplished.
I urge any of my seven followers (whom I assume to be thought police) to please clarify where I am hazy and wrong and to hopefully refute my contention that all is confusion and even the sophisticated derivative software programs could not figure this all out - or if they did then some people knew and why are those people still not going to prison?.
First please note that Mr. Sunshine (what a lovely name!) did NOT say that everything was just peachy fine with the economy and we had nothing to worry about. Seond, what he did say is that all the hype about hyperinflation is not born out be the facts. Period. Thanks for that ray of sunlight!
www.reason.com/news/sh...
Forgive me if I have this wrong, but the Feds printing money, giving the banks money, then the banks giving back the money to the Feds, thus offsetting the money supply growth numbers, makes me scratch my head. Aren't the banks supposed to be lending out the money to help support the building of our economy?
On Sep 03 12:52 PM JeffDB wrote:
> On the other hand, M1 had increased by 19.9% year over year. According
> to the Fed's numbers research.stlouisfed.or...
>
>
> M1 (billions)
> 8-16-08 1383.3
> 8-17-09 1658.2
> Graph: www.scribd.com/doc/193...
>
> M2 increased less, but still was a little over 8% year over year:
>
>
> M2: research.stlouisfed.or...
>
> 8-17-09 8312.4
> 8-18-08 7691.4
> 621 / 7691.4= .0807
>
> Graph: www.scribd.com/doc/193...
Ignore the storm clouds on the horizon and the hurricane warnings for Hurricane Inflation.
Mark says don't worry - monetary velocity will save us!
What a myth! Velocity is just more garbage spewed by economists who don't have a clue - the same economists who talk about efficient market theories, etc.
Not only did the fed give trillions of dollars to the banks at 0% interest to lend out to hapless citizens at 5% or more, they also took banks "excess cash" and paid them interest on it?
No moral hazard there (*cough*).
If this is truly the case, why did they need to do anything? If the banks had so much excess cash, they didn't need to be bailed out, no?
If the FED did need to play the Parent spoiling the child with the banks - and give them free money to lend at interest while at the same time paying them interest on their "excess cash" - isn't this simply encouraging yet another credit bubble?
This almost guarantees that banks will begin making bad loans again, or speculating on bad loans with new instruments, while not worrying about the prime residential loans starting to fail, as well as commercial real estate failures impending. Why? Because Uncle Sam (and Ben and Timothy) will wipe their butts all over again and give the average citizen the dirty diaper.
If that isn't an eventual road to hell, I don't know what is.
That's not a personal attack or name calling, but a fair and accurate commentary on the content and likely motivations behind it (IMO, these articles do not appear objective). If there's something so awful that it deserves being deleted, please let me know. Or does SA delete posts that point out the obvious, if someone doesn't like confronting it?
Interesting theory.
This article is poorly researched (800 million to fund 80% of the Fed??? policy objectives). Order of magnitude error with the numbers here.
It is opinion backed by no fact - there are no numbers worth the name.
Sunshine I repeat has to be a joke surname for a person with a PollyAnna outlook.
Last, whenever ANYONE uses the percentage 80 unsupported, I assume it is purely their invention and challenge them to build thqt number with a quantified list of values. Shame on you Seeking Alpha if you delete this again.
The bad side of this forum is that it gives big space to this sort of stuff which would have been better authored by H C Andersen. Perhaps Mr "Sunshine" is related to someone in the Bernanke Helicopter Company?
You just increased the amount of cash available to the market not just by by the amount of alleged "excess cash" that would have been withheld from the market, but also by the interest paid on these reserves. The Fed is thus excerbating inflation, not curtailing it.
It would have been better had the Fed "printed" the monies out of whole cloth. As it stands, not only has is the Fed indebted the Govt by the amount borrowed from the banks, but it's paying interest on it as well!
Are we screwed, or what?
Given that this article/research is actually a work of fiction - in that it is intended to offer opinion based on analysis, but nothing is cited except opinion - we should deplore this garbage stridently and often. If the author feels maligned he should put up a detailed defence of his POV for acknowledgement or ridicule according to its content - so come on Mr Sunshine - put up or shut up.
On Sep 04 02:10 PM Ergo wrote:
> So I notice my post got deleted - where I said this article would
> make an ironic example in a few years, that I'd save a link so it
> doesn't get forgotten (which I have), and that the author is pumping
> Sunshine - just like he always does in his articles.
>
> That's not a personal attack or name calling, but a fair and accurate
> commentary on the content and likely motivations behind it (IMO,
> these articles do not appear objective). If there's something so
> awful that it deserves being deleted, please let me know. Or does
> SA delete posts that point out the obvious, if someone doesn't like
> confronting it?
They removed the first paragraph where I urged the author to update the article to include the correct fact that the Fed was NOT using existing Federal Funds on excess reserve to purchase assets.
On Sep 03 07:22 PM kylesch wrote:
>
>
> The Fed did not entice banks to deposit their existing cash on reserve
> at the Fed. The Fed really did print the 1 trillion+ dollars and
> then used a combination of instruments to place this out in the marketplace
> (TAF, TALF, buying commercial paper, buying treasuries, buying agency
> debt and CMBS ...).
>
> Once the Fed has given the newly printed cash to the banks in exchange
> for their assets as collateral, the banks have then taken this cash
> from the Fed and have left it on deposit as excess reserves.
>
> Remember, the Fed has been trying to *increase liquidity*. If the
> banks were simply leaving existing cash on reserve at the Fed, this
> would have decreased liquidity (removed cash from the system).<br/>
>
>
> For those interested, John Mason, a former economist at the Fed,
> has a post that touches on this very subject: maseportfolio.blogspot...
>
So how come we've never heard of this magical cure until now??
In particular, why didn't Bernanke bring it up while he was busy patting himself on the back at Jackson Hole??
Velocity is low due to much of the QE ending up in the Banking System as “capital”. Capital is just sitting there by design. Capital not being made available for lending .
However, simultaneously deploying QE and Keynesian Deficit Government Spending in an environment of Hyper-Debt is dicey at best.
A clear unintended consequence in these uncharted water is inflation. Cascading unintended inflationary pressures exist.
1. When you say that banks declared insolvent are said to hoard money;
2. When you state that M1 has barely increased and
3. when you claim that America's economy was in trouble in 2007.
You state: " If the velocity of money slows down, i.e., the number of times it turns over goes down, then GDP must fall. When the economy was in big trouble, in late 2008, banks, consumers and businesses were hoarding cash, which meant money wasn’t turning over."
Thank you for admitting that GDP fell because the money was not turning over. And that was due to the FED changing accounting rules, according to which new rules, the banks were broke. Bernanke in fact is trying to fix the harm he and his cohorts had caused for political reasons. Bernanke and everyone else involved in crashing the economy should be tried for treason.
online.wsj.com/article...
On Sep 03 01:14 PM Dumb Question wrote:
> I am not sure of the mechanics, but I don't beleive the author does
> either. Is this right?
>
> Step 1. When the FED buys Crappy Mortgage Asset (seekingalpha.com/symbo...)
> from DUMB BANK, The FEDs assets go up and the DUMB BANKs cash goes
> up. To get the money to pay for the CMA, the FED sells bonds, or
> shorts bonds, but in essence the FED borrows. The result is the CMA
> goes to the asset side and the shorted bond to the liability side.
> (this in essence increases the debt/equity leverage ratio of the
> FED which is not regulated, or audited.)
>
> Step 2. The DUMB BANK now has cash. DUMB BANK doest not like that.
> They make money by lending, so they lend it to new dumb mortages,
> credit cards, other banks or back to the Fed. If it becomes a loan,
> than it appears that nothing happens, but in reality, this loan (cash)
> becomes a deposit at STUPID BANK.
>
> Step 3. If STUPID BANK takes in a deposit, STUPID BANK is required
> to put a reserve back to the FED. In the STUPID BANK did not earn
> interest. This reserve requirement was required so STUPID BANK could
> access the Fed window in an emergency. The reserve requirement is
> based on the riskiness of their loan book, but lets call it 8%.
>
>
> Step 4. STUPID BANK takes in a deposit, and then puts the 8% reserve
> on deposit at the FED. The rest of the cash recycles to new loans.
> And so on and so on.... Loans become deposits, deposits require reseerves,
> new deposits become loans etc. After 12-15 transactions of the banks
> have recycled the money. The FED borrows the treasury bond, buys
> the CMA, and then after 12-15 transactions, the FED has gotten in
> all of it intial purchase price of the CMA in the back door as reserve
> requirements.
>
> COMMENT: What Bernake did when he "persuading Congress to pass a
> law that allows the Federal Reserve to pay interest on cash deposits
> at the Federal Reserve," Bernake INCREASED the profits of STUPD BANK
> and DUMB BANK, and decreased the profits of the FED.
>
> Step 5: When the FED now goes to sell the CMA or it matures, the
> FED will take in cash and pay off its loan or shorted Treasury Bond.
>
>
> However, the money is still out there.
>
> Only after 8 -12 banking transactions will you see inflation. <br/>
>
> Is that right?
>
> Am I right?
>
> Or is the author right?
>
>
>
>
>
>
Not to rain on your parade (and I do agree, Mr. Bernanke and
company have proven skillfull in shifting money around from
pillar to post, and I do agree that there has not as of yet been
a frenzy of printing press activity at the FED ), but the history
of central banking systems does not augur well for financial
stability and never really has. Regardless of the polished
balancing act Mr. Bernanke and his jongleurs pull off with impressive aplomb, the die has already been cast for serious
heavy duty deflation/depression and an examination of the
historical data on the Federal Reserve Board bears this out,
a fact you fail to mention.
E. Tippett
Chicago, Illinois
More importantly, the major banks have still very tight requirements as to lending. Are banks hoarding cash as he states they are now not doing? My answer is yes and no. Just ask any large REIT if they have easy funding for any deals they need/want to finance/refinance. The answer will be NO!!!!!!!!!!
Bernake and his team may have done a very good job of getting us to this point in time but at best they are sometime between first and second base in the first inning.
We will see a retesting of all major US market to 750 on the S&P.
1) On what evidence do you state that Fed ENCOURAGES banks to deposit their funds at the Fed? This is exactly where Fed is failing in injecting the liquidity into real economy. Commercial banks recycle the fund back to the Fed not to earn the tiny interest, but because they see no credible lending opportunities, and as argued in 3) below, they have forgotten how.
2) Indeed, the slow speed of money is preventing the massive new liquidity Fed has injected from reaching the real economy and causing inflationary pressure TODAY. However, the more Fed sees the low RATE of utilization of money, the more money it prints in the hope that more NET money will be utilized as the result. This is like building a bigger and bigger dam. The risk is that no way one can tell if the dam, although today only trickling water to the down stream, will not burst down at some point in the future, and whether when it happens, Fed has extremely powerful tool to contain the ensuing flash flood.
3) Fed has not realized that the low speed of money today is largely a structural issue rather than a cyclical one. The monetary policy is the wrong policy for the structural problem. In the past 3 decays, the US financial market has gone through the transformation in which Commercial banks have largely been replaced by the securitization market as the main lending institutions of US. This has been known as Bank dis-intermediation. By 2006, 75% of the US C&I loans and 90% of the US consumer loans have been financed by securization market. Leveraged loan issuance used to be $1 tri yr as of 2006, so is the subprime + card + auto loans + student loan market, all issued in the form of securitized debts. Now, these markets are close to zero on issuance. Fed DOES NOT UNDERSTAND that US banks have not been doing lending for over 20 years!!!!!. They originate and package and sell to a vast and diverse capital market. It takes another discussion to argue on the merits and evils of this mechanism, but nevertheless this has been the hallmark of the US financial market for the past 30 years. The dismantling of this system is the reason of the low utilization of money that is transpiring today. This is why shuffling liquidity to the banks will not increase lending. The banks simply are not good at it anymore!
begin in 2010-2011.
That is impossible, because many countries have experienced it in the past.
Somehow you are connected to the Brookings Institute maybe? Who pays you to push such utter BS? Its really funny to watch you do this mental juggling act trying to defend the biggest ponzi scheme there is.
What we need is an audit of the Fed. Where is M3? We need to look at monetary policy. Support Ron Paul's HR 1207
Mark you have been programmed. And it disgusts me.
www.youtube.com/watch?...
Every mistake made in the 1930's we are making again... only bigger.
The Fed must go, they can't solve anything now.
This means that bailouts are just beginning and will require bigger and bigger sums of taxpayer money as time goes on. The government will resort to borrowing more and more and eventually to printing money when treasury debt auctions start failing. The end result of this path is a currency collapse and probably total chaos as expected by gold bugs.
One other way to deal with this issue is to stop the bailouts and let the dominoes fall. Defaults and cross-defaults will cause many, many depository institutions (even very large ones) to collapse leading to extreme decrease in money supply as bank deposits are destroyed. Deposits of failed banks cannot be used to pay bills, make purchases and/or service debts.
Which will probably lead to even more defaults as unemployment increases and debtor's are unable to service their debts. This process will probably cause extreme deflation as businesses lower prices in a bid to survive. This will also lead to wage cuts, increased unemployment and a deflation spiral and much chaos. But probably less chaos than a currency collapse.
Is there a better way?
Here is my idea:
1) We essentially need an orderly bankruptcy and liquidation of the United States' financial system.
2) I suggest we create a government owned bank and transfer all deposits of the private commercial banking system to the new government owned bank. This "transfer" is really just new money creation. This new money will be digital cash (electronic version of physical paper cash). Very much like reserves at the FED.
3) Note that the plan will not create net new money since we will be destroying all deposits of the commercial banking system in the process.
4) All assets of the commercial banking system will be transferred to the government and auctioned off in an orderly manner over the next 10 years. The proceeds from the sale would go the United States treasury and not the commercial banks. The assumption here is that commercial banks deserve nothing since the entire industry would have been most likely destroyed any way. Even good banks would have been destroyed due to bank runs and defaults if the government had allowed the dominoes to fall. Of course bank shareholders, bank bond holders and counter parties of bank derivatives would not receive anything.
5) After the transfer FDIC protection will be removed for any private bank which wishes to remain in business or any new private depository institution or bank. From that point on the government should make it absolutely clear that there will be no more bailouts and no more conversions. This will discourage (but not completely eliminate) fractional reserve deposit banking and private money creation that results from pyramiding of government created money. This will also limit debasement of the currency that results from fractional reserve deposit banking. In fact, we can have "free banking" from that point on and not even have reserve requirements or capital requirements. All depositors who use private banks will be fully at-risk. The industry will have to set the interest rate high enough to attract depositors.
6) The new government bank will act as an electronic "piggy bank" only. All deposits will be 100% reserve and it will not make any loans. Loan making will be left to the private banking system (with no deposit insurance or a possibility of a future bailout). The new government owned bank exists only as a "safe" money storage and a payment clearing system so the public does not have to carry around physical paper cash to make purchases and pay bills.
6) Of course this plan is not without pain or cost. Cost of funds for banks and borrowers will probably rise as bank deposits are a source of very low cost money for the banks. Nothing is free. We are just exchanging higher cost of funds for removal of systemic failure risk. Economically we are recognizing that when money is loaned there is always credit risk.
7) We are just separating the payment and clearing transaction system which is absolutely necessary for day-to-day commerce (no credit risk) from the loan banking and investment system (has credit risk).
> The government talks about a national health insurance. We would
> have been better off if they had created a temporary national bank,
> where the government lends people money directly at the same rate
> that they lend the banks.
People are not applying for credit (If anything, people are scrambling to pay back their debts. This is assuming they're not defaulting on them altogether.)
What would we gain by pushing credit on people who don't want it anymore?
The aim is the same to stop money supply shrinking, but method is as I understand it to buy up assets such corporate bonds etc, using money they have created, i.e. printing money, which I think in line with what Milton Friedman said the Fed should of done in the 1930's.
On Sep 06 02:33 AM If_then wrote:
> Cannot agree with you on any of your ideas
>
> 1) On what evidence do you state that Fed ENCOURAGES banks to deposit
> their funds at the Fed? This is exactly where Fed is failing in injecting
> the liquidity into real economy. Commercial banks recycle the fund
> back to the Fed not to earn the tiny interest, but because they see
> no credible lending opportunities, and as argued in 3) below, they
> have forgotten how.
>
> 2) Indeed, the slow speed of money is preventing the massive new
> liquidity Fed has injected from reaching the real economy and causing
> inflationary pressure TODAY. However, the more Fed sees the low RATE
> of utilization of money, the more money it prints in the hope that
> more NET money will be utilized as the result. This is like building
> a bigger and bigger dam. The risk is that no way one can tell if
> the dam, although today only trickling water to the down stream,
> will not burst down at some point in the future, and whether when
> it happens, Fed has extremely powerful tool to contain the ensuing
> flash flood.
>
> 3) Fed has not realized that the low speed of money today is largely
> a structural issue rather than a cyclical one. The monetary policy
> is the wrong policy for the structural problem. In the past 3 decays,
> the US financial market has gone through the transformation in which
> Commercial banks have largely been replaced by the securitization
> market as the main lending institutions of US. This has been known
> as Bank dis-intermediation. By 2006, 75% of the US C&I loans
> and 90% of the US consumer loans have been financed by securization
> market. Leveraged loan issuance used to be $1 tri yr as of 2006,
> so is the subprime + card + auto loans + student loan market, all
> issued in the form of securitized debts. Now, these markets are close
> to zero on issuance. Fed DOES NOT UNDERSTAND that US banks have not
> been doing lending for over 20 years!!!!!. They originate and package
> and sell to a vast and diverse capital market. It takes another discussion
> to argue on the merits and evils of this mechanism, but nevertheless
> this has been the hallmark of the US financial market for the past
> 30 years. The dismantling of this system is the reason of the low
> utilization of money that is transpiring today. This is why shuffling
> liquidity to the banks will not increase lending. The banks simply
> are not good at it anymore!
clothing cheaper across the board it costs less to eat out or eat at home, vacations, hotel rooms, airfares flat screen tv, cell phones computers every thing but taxes and health care which I see as interchangible anyway are markedly lower than they were 12 months ago. The only thing that is costing a lot more is gold which seems to be the pessimists go to investment. It seems to me that hyper inflation while possible is no slam dunk as many here posit.
On Sep 03 02:48 PM CC_Gold wrote:
> Here we go again with the deflation and inflation babble.
> Here's what you college trained Keynesians don't realize.....
> Consumer price inflation or deflation is a direct result of the printing
> press and asset inflation or deflation is a direct result of credit
> contraction or expansion. When consumer prices are inflating and
> asset prices are deflating, you have disinflation. The FED is leveraging
> monetary inflation against asset deflation to reinflate the asset
> bubble. They are attempting to do this by using a zero interest rate
> policy, removing "toxic" assets from the lenders, and liquifying
> the banks with cheap money. This plan is not obviously working. That's
> why you still see deflation in asset prices and rising consumer prices.
> The best way to reinflate the asset bubble is to give consumers the
> money instead of the banks. The banks are at the bottom of the funnel
> not the top. They are like the drain in a sink and the consumer is
> the water. If the water dries up, the drain is sucking air.
President Obama is hopefully enjoying the absurd breeze of opponents of his speech tomorrow encouraging students to buckle down. He would appear to be a truly moral, ethical leader, and our country sorely needs somebody who can lead, not out of fear, but out of optimism toward putting a fire under our innovative potential.
Detractors rose up when America went into debt to execute the Louisiana Purchase. Wow, what a wise investment. I think that Obama is borrowing not to create a new generation of consumers, but to invest in the creation of a generation of innovators. To do that, we need adequate health care, clean safe schools, and leaders who will show the way to our renewal as a nation. If we unite behind those principles, we will prosper.
Leland
Email it to me, if you would be so kind leland@mothermedia.org
I don't get here that often.
On Sep 04 02:02 AM CC_Gold wrote:
> Buy Gold-
>
> You're partially correct, but go back to Monday and see why the markets
> had a sell-off. There was panic on the trading floor because there
> was indications that a foreign government was going to default on
> their otc commodity derivatives contracts. This default would essentially
> bankrupt the three largest U.S. banks. This same government is seeking
> all 400 tons of IMF gold. If they do default on these contracts,
> it would ignite the derivatives death star and over 1 quadrillion
> of non-existent money would be unwound. The trade-off is simple.
> Give them the gold or they will launch the first salvo that will
> topple the whole otc derivatives ponzi scheme. It's the commies
> vs the crooked banksters. Who will win. You are all about to find
> out. Stay tuned. The current run to gold is a sheer panic move
> because in the end - paper is still paper.