austrian63

Don't Be Fooled by Inflation

Ricard,

One error in your response. Bernanke has not taken unconventional steps to "DEFLATE" asset bubbles. He has taken unconventional steps to RE-INFLATE asset bubbles and therein lies the rub. There will be a very high price to pay.

Each subsequent market deflation is much more horrific than the previous one and thus requires a much larger dose of the re-inflation drug than the previous one. This is what Hayek decrobes as having "A Tiger by the tail." The cure is the disease and more cure only makes the disease worse until finally the party is unsustainable and even the U.S. Treasury and Federal Reserve with their infinite wisdom and money creation abilities will not be able to sustain the booms.


On May 10 06:21 AM Ricard wrote:

> This is a rather interesting article from Mr. Schiff.
>
> Something I've noted is that he apparently has the reputation of
> getting the macro picture spot on, but unfortunately being unable
> to transform that into portfolio gains. I'd suspect it may have to
> do with market-timing, evidenced by his bold prediction here of a
> 2-year stimulus rally.
>
> Running with this theme (which may very well be correct, and may
> actually give Cetin an A+ in weathering this downturn), it's entirely
> probable that the economy may 'fully recover' from this stimulus
> package as it did from the last one in 2002. Bernanke, like Greenspan
> before him, has taken unconventional actions in trying to deflate
> asset bubbles, and like his predecessor, may have to be held responsible
> for any unpredictable consequences. If this thesis hold true, then
> perhaps, like last time, the bubble will not pop - the landing will
> not only be soft, it will be as if the markets landed on a trampoline,
> propelling them to even higher dizzying heights, until at some point
> the subsequent fall destroys the trampoline, and the markets along
> with it. Maybe during the next 'crisis', the fed will be forced to
> adjust reserve ratios, i.e., the nuclear option.
>
> So, to summarize my rather complicated comment - maybe Schiff has
> a point - markets artificially recover, do not experience the much-needed
> recession and readjusting, and the bubble never pops. My contribution
> to this thesis is that perhaps we are setting the stage for an even
> larger and longer artificial boom.
>
> Anyway, thanks again Mr. Schiff for another interesting read.

Monetary Madness in a Single Chart: Hyperinflation's Just Around the Corner

MBS's are not money. They are not part of M1, M2, M3 or M"pick a number." To state that the Fed has created all of this new money to replace money that was destroyed via the reduction in the value of long-term investments is incorrect. None of these assets are "money" and none of them are included in the monetary measurements. They all have liquidation costs and take time to convert/realize into money. Oh, and your house, which may have also lost value, is not money so the reduction of real estate values also does not represent "destroyed" money.

It is a common, logical fallacy to conclude the new money being created out of thin air merely replaces the old money that was lost due the popping of the Fed's real estate bubble therefore we should not worry about devaluation. Most mainstream economists, who by the way never saw this bubble or its bursting coming, will parrot this view but it does not make it true.

On Jun 13 04:47 AM nobby73 wrote:

> As others have said, this graph is misleading. This money has been
> created to replace the other forms of monetary assets such as MBS,
> which were sucked out of the system.
>
> It makes much more sense to look at broad money supply as you then
> see the monetary base had been expanding at a much faster rate than
> this graph shows and the collapse in the repo market for ABS was
> the hugely deflationary event this stimulus was designed to counter.
>
>
> Were we have seen hyperinflation, eg Weimar Germany or Zimbabwe,
> you see shocks in the relationship between prices and wages. Efforts
> to create price controls which lead to lack of supply of goods followed
> by large wage increases to counter price rises when those controls
> are reduced. I don't see this happening in the US....

Monetary Madness in a Single Chart: Hyperinflation's Just Around the Corner

Not to dminish Laffer's points but he didn't see this coming in 2005 and 2006 when he said the U.S. economy was stronger than it's ever been.

We need to stop calling rising prices inflation. Inflation is growth (just like blowing up a balloon - a bubble) in the money supply. This growth causes a decrease in the Purchasing Power of Money (PPM). Laffer states in his article the Fed signaled a 180 shift from an anti-inflation position to an anti-deflation position. The Fed has NEVER been anti-inflation and has ALWAYS been anti-deflation. Unless you know of any one else besides the Fed who can create money either by printing new paper slips (Federal Reserve Notes) or increasing member bank reserves (expansion of bank credit) only the Fed can create inflation.

Why do we continue to discuss the Fed as if it is sometimes "hawkish" on inflation. The purpose of the Fed is to be the "lender of last resort" and to inflate the money supply. Here's a quick peice of trivia: since 1913 the U.S. dollar has lost approximately 96% of its purchasing power under the watchful eye of the ever hawkish Federal Reserve Bank whose initial mission was, get this, price stabilization. In the 93 years prior to the birth of the Federal Reserve Bank (1820-1913), a terrible time for sure since there was no Central Bank run by geniuses whose very words were worshipped by the chattering classes, what cost $1.00 in 1820 cost $0.63 in 1913 due to increased productivity and the growth of goods and services in the market place competing for dollars. This was a time when money still had both of its original purposes (1) a meduim of exchange and (2) a store of value. It is no longer a store of value thanks to our wise rulers in Washington D.C. But I digress.

Laffer's predictions are most likely true which proves one can actually be right, some times, even for the wrong reasons. Currency devaluation is a better description of what lies ahead and it will entail both rising prices and rising interest rates. It will be very interesting.

A Strong U.S. Dollar Isn't in Anyone's Best Interest

Right on. We are actually consuming capital now. As we continue this our ability to produce will fall more and more over time as we consume more and more of our capital base with zero % interest rates and continued borrowing. Debt is subject to the same law of diminishing marginal utility that money is.


On Apr 03 02:48 PM clam75 wrote:

> Mr. Harless is supportive of statist intervention in the economy,
> as this article demonstrates. Moreover, he wrote a book entitled
> _The Indebted Society_ that had a forward from John Kenneth Galbraith.
> A Publisher's Weekly review of his book indicates that he calls for
> "tax-sheltered personal savings, legal job protection for older workers,
> extension of unemployment benefits and drastically slashing the federal
> deficit by further taxing the top fifth of U.S. households." So,
> from his point of view, a weak dollar and interventionist state would
> be positive.
>
> As an Austrian School follower, I believe the opposite is true: a
> strong currency reflects people's desire to purchase things produced
> by the nation where that currency is in use; they need that particular
> currency because they need to pay for the items they purchase. That
> brings to light a key problem for America: our production capacity
> has been declining for years because of interventionist government
> and unsound money. Until we can re-establish production, the dollar
> is going to continue declining in value.

A Strong U.S. Dollar Isn't in Anyone's Best Interest

12345 is correct.

From 2001 through 2007 the U.S. $ depreciated against the Euro and gold not to mention oil and other commodities. How could this support Harless' claim of a strong U.S. $ during this period?

Not to fear, the dollar will begin depreciating heavily against real goods by the end of 2009 or in 2010. The current monetary inflation - inflation is not rising prices but an increase in the supply of money, which then leads to rising prices - will guarantee this. Money is like all other goods and subject to the law of diminishing marginal utility. Each additional unit, created out of thin air, reduces the value of all previous units. This effect will be even more pronounced if production, the quantity of goods and services available for purchase in the economy, stays flat or decreases over time. Then you will have even more monetary units chasing a smaller inventory of goods and services.


Mr. Harless will get his wish as the U.S. $ will weaken over the next several years more than we can imagine.


On Apr 03 01:48 PM 12345 wrote:

> “A strong dollar is in our national interest,” still echoes through
> the air in the District of Columbia. Never mind that the strong dollar
> was largely responsible for the housing boom that led to the current
> bust."
>
>
> WHAT! The Dollar was falling fast during the Boom, cheap money and
> a weak Dollar is what drove housing prices so high. How can a strong
> Dollar drive prices up?