Raymond Micaletti

How The Federal Reserve Is Monetizing Debt

Given the recent sentiment survey in the dollar that revealed only 3% of traders were bullish on the dollar (a level that has marked major lows previously), I have two questions:

1) Is there anyone left to sell the dollar?
2) If it *is* revealed that things are not as rosy as they seem, might that not set off a stampede for the relative safe haven of the dollar as the world is still pretty much dependent on the U.S. consumer to drive growth?

Why High Inflation Will Not Take Hold

Incidentally, when stocks are in secular bear markets, commodities are in secular bull markets. So commodities are likely to do ok, but if they do too well, that puts the brakes on the economic recovery, which hurts demand, which hurts commodities prices. Thus, we are likely to get a modest amount of inflation, but too much would just work against the economic recovery. Moreover, the government would have to withdraw that liquidity at some point, thus increasing interest rates and likely damaging a still-languishing economy, which would kill any excessive inflation on the spot.

Moreover, given the common knowledge that the Fed is printing money, why is gold just hanging out? And TIPS as well? Super high inflation is not nearly a given.


On Apr 24 06:21 AM capitalisthero.com wrote:

> Nice try but your analysis fails on 2 obvious points.
>
> 1. You cannot draw comparisons to Japan. Japan had and has a huge
> personal savings reserve. Japan didn't have to print money b/c they
> just tapped their savings; unlike the US which already has a huge
> government and private debt.
>
> 2. Using your equation M x V = P x T the only way to keep prices(seekingalpha.com/symbol/p)
> from rising when the money supply (seekingalpha.com/symbol/m)
> is rising is for the number of transactions (seekingalpha.com/symbol/t)
> to decrease. But if the number of transactions decreases than by
> definition is the economy is shrinking. If the economy is shrinking
> than the government's tax receipts are decreased which means the
> government has to print more money (increase M). So to avoid inflation
> the number of transactions will have to decrease more which means
> continued shrinking of the economy which meas the government will
> have to print more money and so on and so on.
>
> The only way to avoid inflation when you print money is to have an
> ever shrinking economy or productivity gains which can sop up the
> extra cash.
>
> Sorry guys, there's no easy fix. Divest yourself of dollars and
> buy commodities.

Why High Inflation Will Not Take Hold

What if V decreases and stays low? As it has and may remain....


On Apr 24 06:21 AM capitalisthero.com wrote:

> Nice try but your analysis fails on 2 obvious points.
>
> 1. You cannot draw comparisons to Japan. Japan had and has a huge
> personal savings reserve. Japan didn't have to print money b/c they
> just tapped their savings; unlike the US which already has a huge
> government and private debt.
>
> 2. Using your equation M x V = P x T the only way to keep prices(seekingalpha.com/symbol/p)
> from rising when the money supply (seekingalpha.com/symbol/m)
> is rising is for the number of transactions (seekingalpha.com/symbol/t)
> to decrease. But if the number of transactions decreases than by
> definition is the economy is shrinking. If the economy is shrinking
> than the government's tax receipts are decreased which means the
> government has to print more money (increase M). So to avoid inflation
> the number of transactions will have to decrease more which means
> continued shrinking of the economy which meas the government will
> have to print more money and so on and so on.
>
> The only way to avoid inflation when you print money is to have an
> ever shrinking economy or productivity gains which can sop up the
> extra cash.
>
> Sorry guys, there's no easy fix. Divest yourself of dollars and
> buy commodities.

Why High Inflation Will Not Take Hold

Thank you. In regards to your last point--and I'm thinking out loud here and making no pretense about knowing the answer--if the cost of capital increases because governments need to borrow a massive amount of money, might that not continue to harm corporate earnings (as the cost of capital for corporations will also increase, meaning their net financial expense will increase and their earnings will suffer) and at the same time induce more consumers to save because now interest rates would be higher--thus reinforcing the dynamics suggested in the article? I could be missing something for sure, but that seems to be a not too implausible outcome, no?


On Apr 24 04:56 AM morph366 wrote:

> A very good article but I agree with the point above that your perspective
> is too US-centric. The prognosis for the US consumer may well follow
> your reasoning but increasingly there are the G20 economies to consider
> and many of them do not have the structural problems to contend with.
>
>
> Another problem is that the demand for credit by governments in the
> capital markets will be so massive that the cost of capital might
> increase a lot more than current forecasts are based upon (esp in
> the US and UK) and this will have inflationary implications.