Insiderman

Where the Big Money Is Betting Big

"Of course, the big money isn’t always the smart money. After the tech bubble burst, the big money was decimated. The average mutual fund was getting crushed. Most were losing money between 2001 and 2003. During this time, the big money was not smart money."

This paragraph makes no sense in the context of your article. The BIG money isn't in mutual funds.

Mutual fund managers almost always have a mandate to invest their funds in a particular way; that is, if they were "high tech" funds, then they had to be invested in high tech (with wiggle room to be some proportion in cash). The mutual fund companies fired up funds with a new tech mandate after venture capital companies started bringing companies to IPO stage. The BIG money made more big money when they sold share through the mutual fund to the "herd" of sheep.

Now there IS big money that isn't necessarily smart, and sometimes even if they are smart they are too early or too late to the party. T. Boone Pickens just lost several BILLION over the last few years. Warren Buffett lost his mind over the last few years (well, he was an Obama supporter). Anyway, some might say he was a bit early to the party... but he always has been.

Anyway, don't confuse BIG money with big piles of money from small investors.

Why High Inflation Will Not Take Hold

Maybe I missed this in the comments but if V becomes affected by sentiment (and it has), then a rapid increase in V will have to be accompanied by a rapid decrease in M. Unfortunately, rapidly decreasing M requires that the Fed rapidly sell Treasury securities. increasing the reserve requirement (an elephant gun), etc.

How will the Fed sell Treasuries into this market without a HUGE decrease in Treasury prices and consequent increase in interest rates... usually at a lag. So we'll likely have a brief period of inflatiion accompanied by--yet again--a recession.

As a technical addition to the author's formula, if you use T as transactions, then you cannot use Pi as price level. MV = Sum (Pi x Ti) where Pi is the price of the ith transaction Ti. The MV = PQ formulation, where Q is the real value of final expenditures. I prefer the MV = PY formulation because Y can be used to indicate real income or yeal expenditures in the basic GDP model.

So, if V increases dramatically, M must fall dramatically. Typically P and Q will also shift about in the short-term. Unfortunately, government operational, administrative, and recognition lags will tend to cause the adjustment of M to be inaccruate with respect to the impact of V. P and Q fluctuate cyclically in the process.

Evidence That Big Inflation Is Coming

Monetary stimulus works on the real economy in the short run, but fails in the long run as everyone realizes their earned income purchases less and less.

On Jan 25 07:49 AM [e-mail] wrote:

> Your comment -- "When a central bank doubles the monetary base in
> a matter of months, a lot more money is going to be flooding into
> the real economy. It will compete for finite goods, services, and
> investments, driving up prices" -- doesn't this instance send a message
> to manufacturers and service providers to rehire and crank up production
> to satisfy demand, thereby correcting the problem?? What am I missing?

Additionally, I disagree with the author's contention that the fall in Texas home prices after the oil shock wouldn't qualify as "deflation." Totally false. In the short-term, the initial influx of home buyers must compete only for the 3k homes available (vertical supply curve). An outward shift of the demand curve brought by the influx of oil folks means that prices rise (inflation: too many dollars chasing too few goods). Over time, a new equilibrium short-run supply of homes exists and prices stabilize or perhaps even fall slightly if the area becomes overbuilt. When the oil people move on, the supply of homes remains the same and the demand curve shifts invward. This results in falling prices for the same goods.

Sorry, but those are the very definitions of inflation and deflation.