Alexander Mizan

The Unsustainable Lie of Inflation

Paco,

I tend to agree with you that the government in the last few decades (probably since Nixon took us off the gold standard completely) has shown consistent euphoria in printing dollars and devaluing the currency vis-a-vis real goods. I also agree that real wealth is derived from efficiencies, technological and educational, not from economic policies.
Yet, I think you should reexamine your thesis when it comes to controlled inflation coupled with responsible fiscal and monetary policies.Studies in history, psychology and economics have clearly shown that the best environment to operate an economy is in fact controlled inflation.
The reason for this is that an economy can only grow when people are willing to spend money. An economy where people expect money to be worth more in the future than the present is going to be inherently stagnant. Due to game theory, the people who save while the rest are spending are better off, but if all of us were saving and nobody spending we would have a phenomenon of a protracted recession or depression.
That would result in economic contraction and lack of productive investment because nobody would be willing to invest or consume. With lack of productive investments, you would not see the technological breakthroughs that do in fact bring progress, prosperity and eventually wealth to a society as a whole.
I think the problem lies herein and if we exclude the last 2 years, I think the Fed has been a responsible actor in managing monetary policy. The underlying problem lies in the fact that the last 20-30 years, the percentage of REAL productive investment in technology, R&D, education etc has declined vis-a-vis consumption.
This is a direct result of government policies that focused more on maintaining consumption rather than investment and unfortunately that is the responsibilty of the government and sorry to say the people that voted for it. I can still recall a previous President calling for the American People to "go out and shop". And this comment is not partisan. I think the leaders available that can re-focus on the long-run well-being of their voters are greatly diminished compared to the 40s, 50s and 60s but that has to do more with the people who elect them. Unlike Nazi Germany, we do live in a free country, so the ultimately responsiblity falls on the shoulders of the American people who fail to vote out the incumbents and ask for REAL change.

Is the U.S. Solvent?

I am not sure but from what I remember from my Macro class in college it should go something like this:
1. Fed lends money to banks throught the discount window at the discount rate (fed funds rate + 50 bp)
2. Banks right now instead of lending it out to businesses, individuals etc are afraid. Instead they are hoarding it. They don't really lock the Ben Franklins in vaults. What they do is Buy Treasuries at ridiculously low rates (10-year is now trading at 2.40%). The Fed is basically forcing them to borrow at the window due to the so called "target rate" but that's a topic for another discussion.
So, as of right now the excess monetary supply has not yet hit the real goods market (main street) and that's why we are not seeing any signs of inflation. But at some point the banks will realize that it's stupid to buy T-bills at these stupid levels and find "better" return scenarios in other investments. The spreads between the G-bonds and the C-bonds will close and the corporate market will get flooded with money. That will be the bottom and possibly (if the fed doens't start raising rates quick) the start of runaway inflation like some pundits claim.
So, watch out for the corporate bond market and watch those spreads. Once the banks flood that market with money, it's like a show of confidence that there will be no bankruptcies. The companies basically take all this cheaply borrowed money and start spending it in investments, goods, you name it. Then you have too much money chasing too little goods (i.e. inflation).

My two cents.



On Jan 09 09:51 AM Long John Silver wrote:

> When the Fed starts buying up all the new Treasuries that need to
> be issued, exactly how does that result in monetizing the debt? I
> know intuitively that this must be correct, but technically, how
> does the money that the Fed gives the Treasury get into circulation?
> Is it through government expenditures (e.g., procurement on contracts,
> Social Security payments etc?). Insights?
>

U.S. Dollar: The Trade of the Decade

PATHETIC!

You are talking about future appreciation in the assets the Govt is buying (Uncle Sam is buying on the cheap) and then in the immediate paragraph afterwards you are talking about deflation, crashing commodities prices and a stong dollar and savings rate.

Write a new article when you start making sense and stop contradicting yourself. Oh, and can you sell me some Yuan futures vs. the Dollar. I cannot buy them as a small investor in the currency market becuase of restrictions but if you are so eager, then maybe we can trade off the books.