So as Bernanke once promised/threatened he might, the Fed is turning to on quantitative easing. The markets don't seem to like it much, and why would they? It's like when your grammar school started having Fallout Drills. On the one hand, it's nice that they're planning, but on the other hand . . . why bother finishing that math homework? What do they know that we don't?
For those of you who are not up on the term, basically, the Fed is doing its damndest to print money, hampered by the fact that most of what we now consider "money" doesn't come out of a government printing press--actual currency is only a fraction of our money supply. It is easy to print little pieces of paper with pictures on them--just ask Gideon Gono. But most consumers and businesses in America are not set up to take large payments in cash. So instead, the Fed is going to buy up about $1 trillion worth of securities in order to flood the market with new money.
Do any other old codgers out there in my audience remember back when $1 trillion was a noteworthy figure, rather than the minimum price needed to get people to take your policy seriously?
The dollar is down, of course, since this means that there will be a lot more of them in circulation, making each individual dollar less valuable. The stock market is also depressed. The gold bugs are laughing all the way to the bank.
Will this work? Damned if I know, and I bet Bernanke doesn't either. It should work, in theory. But while in theory, theory is the same as practice, in practice, they differ. These days, more sharply every day.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
Finally!
So why the hell don't we give counterfeiters Heroes of the Soviet United Stes medals? after all, they are injecting liquidity!
Umm, your first link leads to the baby-boom story. Surely, they can't all be Ben's babies? ;)
"But while in theory, theory is the same as practice, in practice, they differ. "
That depends on the theory, Sweety. The Austrian model conforms to reality nicely.
Please excuse me for sounding ignorant, but isn't part of the problem that in other countries people have been stockpiling $'s as a hedge against inflation of their own currencies, taking huge amounts of money out of the economy?
Zic, actual printed money (M1) is, as Megan mentioned, a small fraction of the total supply (M3). Most money is just electronic ones and zeroes in bank computers.
When cash money gets hoarded by foreigners, it actually is a big plus for the U.S. because those bills (called eurodollars) are de facto loans that we will never have to repay.
Eurodollars are not to be confused with Euros, the currency of the European Union.
Is everyone assuming this is how we've decided to stop housing prices from falling... buy mortgages with phantom money until houses which are now selling at $100,000 sell again at their peak of $200,000? Banking problems fixed! Bernanke, et al must prefer hyperinflation to slow deflation.
Sidenote: It's strange that McArdle continues to use the pejorative "gold bug" when talking about Titans like Peter Schiff and Jim Rogers. She'll probably still be using that term when it's at $3000 a year from now... and they've been right about almost everything.
Wait, I see the stock market as roughly flat since this was announced.
zimbabwe here we come. In zumbabwe $1 trillion won't buy an apple (the fruit, not the company).
"It's strange that McArdle continues to use the pejorative "gold bug" when talking about Titans like Peter Schiff and Jim Rogers."
It's not strange if you understand the blood feud between the Cosmotarians and the Paleos, the Monetarists vs. the hard money guys, Chicago School vs. Austrian School.
Megan and company are cheesed off that her liberal friends on the cocktail party circuit might confuse her sophisticated ideology with that of us rubes out here in flyover country who can't even distinguish a frappuccino from a banana nut latte.
We're living in an experiment. May as well keep trying things to see what we learn. It's going to be painful no matter what. Let's stop bitching and do our best and see what happens. [Sincerely, without irony.]
I don't see the Chicago guys and the Austrians as that far apart. Both seem to have pretty good grip on the importance of the money supply, just disagree on what it means for monetary policy.
The experiment has no control. The hypothesis isn't falsifiable.
The money printers will just claim that we didn't spend/print enough and Next Time we will be prepared for the unintended consequences that will will learn about this time the hard way.
Some experiments blow up the lab. Are you sure you want that kind of empirical validation?
Next time you are in New York I'll buy you lunch.
"I don't see the Chicago guys and the Austrians as that far apart. "
That's true. We're related...just like the Arabs and the Jews. When tReason Magazine ran the phony Ron Paul newsletter story, it was just like a family reunion in the Gaza Strip.
It's not just a dispute about the money supply. It's a dispute about the definition of money. Austrian economics is like chemistry and Monetarism is like alchemy.
Which hypothesis are you referring to? Spending money and loosening the money supply are two entirely different approaches. I agree that a lot of stimulus fans have created an unfalsifiable hypothesis, but I think its easy to observe results from expanding the money supply.
"So as Bernanke once promised/threatened he might, the Fed is turning to on quantitative easing. The markets don't seem to like it much, and why would they?"
Yesterday, the headline on Yahoo! Finance was that the market was up because Bernanke started buying T-Bonds (i.e., quantitative easing). Now the market is down today because of the same news? Which is it, Megan?
Maybe the market was down today because of profit-taking after the bounce from last week's bottom? Maybe it was down because investors are worried that Obama administration officials (e.g., Geithner) who were caught flat-footed by the AIG bonuses look even less capable now than they did before this kerfuffle? Maybe the market was down today because investors worry that the populist backlashes against the AIG bonuses may lead to the abrogation of contracts, thus increasing economic uncertainty? Who knows?
There seems to be enough uncertainty to warrant refraining from confidently ventriloquizing the stock market.
Bearded Spock
Just curious, have you read anything from other econ schools besides the Austrian? I think the Austrians may be right on a number of things, but you don't seem to be allowing for any debate on the subject. It just sounds like someone who has read from one source only.
The markets don't seem to like it much, and why would they?
Are you for real? You're taking a single day as a trend?
You're far smarter than this.
Besides, the market's opinion yesterday was *positive* with a significant rally after the 2 p.m est fomc release.
"I think the Austrians may be right on a number of things, but you don't seem to be allowing for any debate on the subject. It just sounds like someone who has read from one source only."
When all you have is a hammer, everything starts looking like a nail.
The dollar is down, of course,
This is at least closer being in the correct context; the dollar index took a significant downturn today on the Fed report. But it should be noted that the index is still close to a mutliyear high. (although not near where it was in the 90's)
Will this work?
Assuming the devaluation of the US dollar is the point, I suspect it has already worked better than expected.
"Just curious, have you read anything from other econ schools besides the Austrian?"
I used to be a monetarist. I've read David Ricardo, Marx, John Stuart Mill, William Stanley Jevon, Hobbes..
....everybody from Smith to Marx. I still have books by Uncle Milty.
Don't confuse my poor attempts to simplify ideas for beginners as a lack of breadth. I'm just not that good of a writer.
"When all you have is a hammer, everything starts looking like a nail. "
How true. Government only has coercive force, so all statist solutions involve restrictions of freedom.
Don't take it personally, I was curious. I actually think this is a good time to find who has the best ideas. I'm leaning strongly toward Austrian business cycle theory. It seems like monetarists had the same money ideas, just weren't willing to take them as far in practice. The main useful thing Keynes did was point out that short run economics could get painful, I don't think even he put as much faith in government stimulus as modern politicians do.
Buoying the housing market? Continuing to price out people in this environment of frozen and falling wages. Brill. Just brill.
Water finds its own level. So will housing prices if we don't keep effin' around with it.
This is going to go straight into commodities via a weakening dollar, which is exactly what happened last year when the dollar fell hard. Combined with a president who has an energy policy that was tried and failed 30 years back, it means higher commodity prices, especially oil and gold.
The one advantage from the recession has been the collapse in oil and other commodity prices. Now, that's set to reverse, so we're going to have the worst of both worlds.
"It seems like monetarists had the same money ideas, just weren't willing to take them as far in practice."
I used to think the same thing, but it turns out that Monetarism is not watered down liberalism. It's watered down Keynesianism.
It's not about the gold standard vs. fiat money. It's private money vs. government money. I don't think that fractional reserve banks should be banned. I think that they should not be mandatory. I don't think that the dollar should be backed by gold. I think we should have competing currencies.
I don't think even he put as much faith in government stimulus as modern politicians do.
It's often tricky figuring out which ones are stupid enough to believe their claims for economic stimulus, and which ones know it's bull but see a way to gain personally. Fortunately, either way the remedy is the same.
Investment tip of the day, stock up on KY jelly. When the quantitative easing comes your way, you'll want some. Don't go for the cheap knock-offs, especially with the size of this easing.
Bearded Spock, I'm not sure I've ever actually heard a serious argument against competitive currencies. To the best of my knowledge, they are not de jure banned in any civilized nation, though I will agree that the harassment government agencies can dole out(e.g., the Liberty Dollar seizure) can amount to a de facto ban.
Thing is, money is a commodity with a seriously positive network effect, and an existing dominant player with an effective monopoly position, buttressed by the fact that a honking big part of the economy(i.e., the government) won't accept any competitors when you're paying its invoices. Even if the stupid harassment stopped, private money would be the domain of cranks, because most people couldn't be bothered in any country with even slightly stable monetary policy. Yes, Zimbabwe loves their USD, but serious countries with serious monetary policy(and yes, I include the United States in that, for the time being at least) use their own currencies, with a little bit of crossover in border areas. It's not a legal restriction, it's a practical one.
Doesn't income tax collection become problematic with competing private currencies? Mind you, I see this as a feature and not a bug....
I wonder if all this buying by the fed was just to piss off the Chinese after their remarks last week. Better not piss them off too much. They could negate all this buying and then some.
Currencies don't compete within political boundaries due to capital gains taxes (this is one reason you see foreign currencies used in blackmarkets in some places), and goverments can alway create demand for their currency by accepting it as the only means of tax payments.
On the quantitative easing- Bernanke's plan is probably going to blow up in his face. I predict that within 2 years, he will end up owning the entire US government bond float as every holder of the longer term debt hits his bids over and over and over. One wonders whether or not the sudden life in the oil market the last few weeks wasn't the first indication this policy was going to be announced this week.
Patrick,
As holders of US debt, both the US Govt and the agency debt, the Chinese will be quite happy to have someone paying premiums for those bonds. I expect them to start unloading it on the Fed at every auction used to implement the easing.
Alsadius,
You may have missed what actually happened with the Liberty Dollar mongers:
"However, in recent years, the company built up a network of "Liberty merchants" who accept Liberty Dollars in exchange for goods and services. And since the U.S. Department of Justice says that federal legal tender laws prohibit the use of privately circulated gold or silver coins intended for use as money, that may have been what led to yesterday's raid on NORFED."
That's 1)
2)You have to pay taxes etc. in US dollars
3)Fiat dollars must be accepted as payment
Competing currencies are most certainly banned in the US. Vegas casinos used to take chips from competitors until the feds decided they had de-facto created a currency. Even those silly local favor trading currencies you see on the news every so often are technically illegal, as is the practice of using pesos.
That depends on the theory, Sweety. The Austrian model conforms to reality nicely.*
*as long as scrupulous care is taken to not quantify or empirically examine "reality".
For the last 20 years the Baby boomers have been kicking in a trillion every year to the stock market. Fueling an incredible party on Wall Street. That is probably 0 right now. They might put some back in the market for a few years but I doubt it will ever be as it was. They are trying to bring back something that can't happen until they pay all the social security and Medicare they can afford over the next forty years. The 50% of the voters who will be on fixed incomes for the next forty years are not going to support a party that wipes out the value of that income with inflation. I think money is going to be tight for a long time to come.
"One wonders whether or not the sudden life in the oil market the last few weeks wasn't the first indication this policy was going to be announced this week."
I'm not Nostradomus. I just listened to Bernanke explain over and over again that the solution to every problem is to print money. He telegraphed his punches years ago.
It's important to understand that I didn't gain anything when gold and oil prices jumped. My gold is still worth 16 ounces per pound and my oil is still worth 42 gallons per barrel. I just didn't lose anything like everyone who holds cash did.
*as long as scrupulous care is taken to not quantify or empirically examine "reality".
WE don't have the tools to do that. You can't solve for two variables at once. You end up making the mathematical equivalent of the "Begging the question" logical fallacy.
Economists, regrettably, read about recessions and depressions in the paper like everyone else. This fact belies the claim that economics is an operational science. Is the evident lack of predictive capacity due to lack of workable theory, or the inability of the community to obtain accurate data on the economy?
It has recently become clear that our economic problems have a strong political component, which makes accurate prediction problematic. How can any theory reliably predict outcomes when the legal rules surrounding the operation of the economy change by fiat on a daily basis?; when corruption on a grand scale drives uncertainty?; when fiat money is injected willy-nilly in unprecedented amounts and in arbitrary places?
I haven't a clue as to what Bernanke is likely to accomplish any longer...I doubt that any of you do either...and that's the problem. There is no longer any stable law, any stable precedent, any reason to trust the government.
I like the Austrians pretty well, though the school sometimes seems like the quantum chromodynamics of economic theory: not wrong, but not the easiest way to get the answer to a problem, either (especially in micro).
I'm curious though what you make of Steve Keen's criticism of Austrian, and other, ideas about money (see here). His thesis is more or less that debt gets turned into money. This seems correct, but I don't know whether he accurately characterizes the Austrian position; he seems to ascribe some fairly hoary ideas about fractional reserve banking to them.
At any rate I'm on board with the Austrians (as far as I understand them, which is not all that much) because they always return their focus to actual production and transactions, rather than ideas about maximizing synthetic quantities like the velocity of money or for that matter GDP.
Legal tender laws: "You will use **our** counterfeit or we will shoot you."
Anyone who's interested in an Austrian take on the current collapse, and the business cycle in general, might want to read Thomas Woods's "Meltdown". Woods is a historian rather than an economist so you get a straight story rather than lots of economic "analysis". It's an easy read, took me about four hours total.
I was wrong earlier. M1 is currency plus checkable deposits. From Wikipedia:
M0: currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). M0 is usually called the monetary base - the base from which other forms of money (like checking deposits, listed below) are created - and is traditionally the most liquid measure of the money supply.
M1: currency in circulation + checkable deposits (checking deposits, officially called demand deposits, and other deposits that work like checking deposits) + traveler's checks. M1 represents the assets that strictly conform to the definition of money: assets that can be used to pay for a good or service or to repay debt. Although checks linked to checking deposits are gradually becoming less popular, debit cards linked to these deposits are becoming more popular. Like checks, debit cards, as a means to complete a transaction through their links to checkable deposits, can also be considered as a form of money.[8]
M2: M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals. M2 represents money and "close substitutes" for money.[9] M2 is a key economic indicator used to forecast inflation.
M3: M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets.[11] M3 is no longer measured by the US central bank.
for more information, go to shadowstats.com.
Hey Megan,
A trillion dollars became the starting number when the cowboys ran away with the herd, and the ranch and the gold mine down the road, and herded them all off a cliff. Cowboys pursuing ideas you were cheerleading at the time.
The S&P 500 went up corresponding to the QE announcement yesterday afternoon. Straight up. So I don't think we can say QE will meet with hostile reception. With supporters and opponents of QE agreeing that the short-term reception will likely be good for the market -- the opponents confine themselves, mostly, to arguing that it poses later inflationary risks -- a blanket claim like Megan's is strange.
I wonder why Megan asserts something either contrary to fact, or without any responsible accounting for the facts. Considering the content of her post is essentially, "this is a lot of money! for theories that may not work!" it doesn't justify that kind of misleading reportage.
The S&P 500 went up corresponding to the QE announcement yesterday afternoon. Straight up. So I don't think we can say QE will meet with hostile reception.
Stocks only went up with respect to the dollar. In euros, gold or oil terms, they are down. The DJIA is not indexed for inflation.
The only competing currencies we should accept are those of nation states. I don't like it, but I don't see any real alternative. When the currency you are "betting on" and invested in is funded by Enron and all of your wealth just became worthless then what?
If only Enron, WorldCom, Lehman, AIG, etc. had their own currencies....
In fact you could argue to some extent they did have their own currencies, their shares.
So if you want to buy competing currencies, put 100% of your money in stocks. The currency of a company is only as good as the value of its assets and the future discounted value of production those assets can produce. Good luck judging that one for 100 different companies competing a la Enron.
I'm not even some leftist who thinks the market is bad. I know that for every Enron there are 1000 other awesome businesses that create wealth. But a lot of people lost their savings in Enron. If Enron had its own literal currency as well, the problem would have been even worse.
Going back to competing currencies, we have competing currencies. And it is a huge nightmare for everyone not American, or every American who goes overseas frequently. The currencies fluctuate so much you can "lose" hundreds of dollars on transactions every day without the actual price of the goods changing.
Currency is far too complex to just put down that we should make it more complex and let the market sort it out.
The situation would be exacerbated. If anything we should be arguing for simplifying the currency issue, not making it more complex. But the political ramifications of that I can't stomach and would be vehemently against in most cases.
I think the "basket" of currencies currently being proposed by everyone not American is actually a good idea for the world, and a very very very bad one for America. So this is how we can see the idea of competing currencies. Some people would benefit A LOT. While a lot of others would not only not benefit, they would lose out heavily. And please don't compare this to income inequality issues. It's not like because Bill Gates can buy an Airbus 380 to fly to work now all of the sudden your iPhone has less utility.
But I can guarantee you once/if the world switches to this proposed currency basket, your dollar will have a LOT less utility.
One problem is that our stupid government isn't giving the world much incentive to keep our dollars. We're actively encouraging people to come up with solutions to "the dollar problem". You can only say "our dollar, your problem" so many times before they come up with a solution.
"When the currency you are "betting on" and invested in is funded by Enron and all of your wealth just became worthless then what?"
Then the same thing happens as when government money becomes worthless. You eat it. Caveat emptor, pal. National currencies fail too. There is no substitute for individual risk assessment.
Four things:
Bearded Spock, your gold is worth 12 troy ounces per pound and always 1,000 grams per kilo;
The Euro looks pretty good as a competitor. Somehow, those clumsy Eurocrats gave the ECB real independence and a mandate to fight inflation;
Stocks and bonds usually move in opposite directions, so it should be no surprise that when the Fed starts buying bonds, stocks fall; and
What comes after "trillion"? Is it time to start using "scientific" notation?
I'm holding out for full quantitative release!
Spock,
But the fact that nations and currencies can fail goes much to my point. If national currencies can fail, how much more failure will we see in terms of various competitors within a nation.
Individual risk assessment is impossible without nations. Don't believe me? Do you think Coke is rushing to build a factory in Georgia/South Ossessia? Where does that put individual risk assessment?
Well if we need nations to provide stability for long term investments, we also need them to provide stability for long term currency.
I'm not arguing that national currencies never fail. I'm not arguing that nations never fail or get invaded or wiped off the map.
But I would argue that constant failure of the money supply is not a feature.
I actually agree with the analysis of the problem and with many other points made by the Austrians. But like so many theorists, their theory has done a good job of observation and critical analysis, but their conclusions are not always sound.
In the short term I think we're completely screwed whatever happens though. All the actions our government seems to be doing is attempting to push the day of reckoning off on to another administration at best (but most likely we're still going to suffer now). It's wonderful to be lead by such "visionaries"
sam,
No, they aren't, presumably because the political risk is too high. There's no universally recognized nation there, but Coca-Cola has managed to do individual risk assessment just fine.
@Sam
Why do you assume that governments are necessary to establish and manage money?
Money is nothing more than a portable store of value to facilitate trade and pre-exists government in any form.
Money will spontaneously erupt in any environment where you have people who need a medium to store value portably, but lack a government to set one. A perfect example is WWII prisoner-of-war camps where cigarettes were the commonly-accepted form of currency.
Government only got into the "money business" because it was profitable for them to do so.
Yancey,
Any sale of treasuries by the chinese will cause the yuan to soar relative to the dollar. Why would they do that? Their economy is in a precarious state right now the last thing they need further appreciating of the yuan.
It's important to understand that I didn't gain anything when gold and oil prices jumped. My gold is still worth 16 ounces per pound and my oil is still worth 42 gallons per barrel. I just didn't lose anything like everyone who holds cash did.
Really? A nice dinner out cost 1 barrel of oil a year ago now it costs 3 barrels. If a nice dinner have cost $150 a year ago and now cost $450 you would be screaming. The value of your oil collapses and you don't even blink. The value of the dollar decreases by 2% and you scream bloody murder.
jmo,
Why wouldn't anyone want to sell an asset at it's theoretical/practical top? How much more valuable can those existing bonds ever get once Bernanke starts trying to follow through on his promise? I predict that when the Fed starts buying the long term stuff, there will be far more offers to sell than the Fed had planned to buy, and this will force the Fed to buy more and more at an accelerating rate just to keep rates from rising and gutting it's own capital base.
Yancy,
The bonds are only of value to the Chinese in as much as purchasing and holding them keeps the yuan from rising and exports competative. A soaring yuan would cause the collapse of the chinese economy.
"Will this work? Damned if I know, and I bet Bernanke doesn't either. It should work, in theory."
Theory, my ass. These people have NO GODDAM IDEA what the hell they are doing. It's just random spew, day after day.
If only somebody had had the foresight a few months ago to predict that Obama was going to be UTTERLY INCOMPETENT. Such a shame.
Oh, wait, 46% did. Including me.
And some didn't, Megan. Like you.
The USA is utterly, absolutely, completely f*cked.
Re legal tender laws, the US Government doesn't seem to actually hold to the position that the various law-enforcement agencies enforce - see, for example, this bit from the Treasury website:
As well, paying debts with commodities other than formal currency is obviously legal, since even the government engages in the practice - see, for example, the decision to fill up the SPR by letting oil companies pay their royalties in oil instead of cash. So far as I can tell, some agencies of the federal government have spent decades enforcing a law which simply does not exist.
,i>Well if we need nations to provide stability for long term investments, we also need them to provide stability for long term currency.
Define nation. Just because we need the rule of law to provide stability for investments does not mean we need a (monopoly) government to have rule of law.
In light of the way the AIG clawbacks violate contract law, it could be argued that governments often are the biggest impediment to rule of law.
Private money would likely be more stable as a currency because whatever non-monopoly bank that supplied it could not rely on government to prop it up. They would have a greater incentive than a central bank to prevent debasement.
Also if one currency among several were to collapse, it would not bring down the entire financial system as a collapse of the dollar would today. Currency Diversity provides stability the same way index funds are more stable than individual stocks.
jmo,
What are the Chinese to do, bid against the Fed? Bernanke is going to inflate with or without them selling. The only logical thing I can think of is to convert dollar-based assets into harder ones. You are assuming the exchange rate is the only consideration for the Chinese, and I don't think that is even close to true. Dollars can buy a lot of things different than US Govt bonds. If one asset you are holding is at a peak, it is probably time to diversify out of it at the first opportunity.
Really? A nice dinner out cost 1 barrel of oil a year ago now it costs 3 barrels. If a nice dinner have cost $150 a year ago and now cost $450 you would be screaming.
I bought oil from 33/bbl to $41/bbl. I bought gold at $925-935/oz. Before that I was mostly shorting stocks and playing the forex.
Don't take it personally, I was curious. I actually think this is a good time to find who has the best ideas. I'm leaning strongly toward Austrian business cycle theory. It seems like monetarists had the same money ideas, just weren't willing to take them as far in practice. The main useful thing Keynes did was point out that short run economics could get painful, I don't think even he put as much faith in government stimulus as modern politicians do.
bombloader and others interested, you might already be familiar, but I'd recommend Hazlitt's The Failure of the 'New' Economics as a good jumping off point. He put Keynes' General Theory to rest in 1959. It's one of those books Megan and her pretend-libertarian friends rarely get around to reading.
Once you have a solid understanding (which Hazlitt provides in spades) of why Keynesianism is rank nonsense, it gets a lot easier to part with monetarism as well.
I bought oil from 33/bbl to $41/bbl.
Caught you in a lie Mr. Spock....
Megan's post reminds me of that old joke:
"I want to move to Theory; everything seems to work there."
What are the Chinese to do, bid against the Fed?
Bloomberg reports that they are increasing their gold reserves. That's not too surprising considering how overexposed they are to dollar assets.
Vulcans don't lie, though they are known to exaggerate.
what lie?
I never said that I haven't lost money in oil before, but my current oil holdings are the ones I bought at $33-41/bbl. Last year I was buying oil futures because the business that I was in had high exposure to rising fuel costs that I needed to hedge. I lost a pile on the futures, made up it at the pump.
The Vulcan jokes keep reminding me of that Star Trek movie where Spock lies to Star Fleet to save Jim (not saying Bearded Spock is lying, just reminded of the scene):
Vulcan intern to Spock: "A lie?"
Spock (pausing): "An error."
We borrowed trillions from China. Now we are going to give them a does of McHopey and Change by inflating our way out of it and leave them owning nothing. It is funny all of the people who ran around screaming and throwing shit like monkeys about how the world hates the US because of Bush, voted for a guy who is going to give the world a real reason to hate us.
It is just amazing. We are screwing ourselves and the rest of the world. The inflationary effects of this are going to be awesome. What is worse, the financial people who ought to be appalled by this are more interested in looting the treasury than the long term health of the economy. If I hear one commenter on here whining about how the credit markets have frozen and the only way out is to bankrupt the government and devalue the currency, I am going to throw up.
Here's the link to the China gold story:
http://www.bloomberg.com/apps/news?pid=20601081&sid=a3mJPCEZdARc&refer=australia
John,
What part of deflation spiral do you not understand? With the price of nearly every commodity down nearly 70%, you're worried about inflation?
Am I wrong or does $1 buy more car,coal,oil,real estate, clothing, copper, steel, aluminum, wheat, corn, soybeans, cotton, now than it did one year ago?
The stock market is also depressed.
A quibble: the stock market lost something like 80 points (on the close) ending a multi-day 900-point run up. Today it's about flat.
"Flat of affect" here is not a symptom of depression.
jmo, what part of a tripled money supply don't you understand?
Prices falling back earth in a correction is neccesary to clear out malinvestment and shift capital from nonproductive uses to productive uses.
Mike Shedlock had a pretty convincing article (http://globaleconomicanalysis.blogspot.com/2009/01/peter-schiff-was-wrong.html) arguing that Peter Schiff has been wrong about a lot of things. Schiff and Jim Rogers have basically been predicting hyperinflation through all of this; Shedlock and Karl Denninger, on the other hand, have been predicting deflation. So far it seems to me that the deflation argument is stronger. I don't know how anyone can say that Schiff and Rogers have been right.
The fact that the Fed is starting QE on such a large scale, suggests to me that they are much more worried about deflation than inflation. Personally, I find it impossible to believe that they will be able to create enough money to counter the large deflationary pressures, without causing the hyperinflation that Schiff and Rogers predict.
A quibble: the stock market lost something like 80 points (on the close) ending a multi-day 900-point run up. Today it's about flat.
a quibble with your quibble: Priced in gold, oil, yen, or euros the market is lower.
Schiff failed to take into account the rush toward more liquid assets that occurs in a collapse. That rush drove up T bills and cash just the way it is Exter predicted it would. Schiff is crying all the way to the bank with the amount of gold he's sitting on.
http://commons.wikimedia.org/wiki/File:Inverse_pyramid_of_John_Exter.png
"What part of deflation spiral do you not understand? With the price of nearly every commodity down nearly 70%, you're worried about inflation?"
Which part of a commodity bubble don't you understand? We were not in a deflationary spiral. We were in a correction from a commodity and real estate bubble. Our sollution, rather than let the bubble collapse seems to be to inflate the entire economy to get the bubble back. It is insanity.
What evidence do you have that inflating our way out is worse than letting the economy contract?
What evidence do you have that inflating our way out is worse than letting the economy contract?
My evidence:
Germany in 1923
Hungary in 1946
Zimbabwe in 2008
is that enough or do you need more?
What evidence do you have that inflating our way out is worse than letting the economy contract?
It's not an either-or proposition. The economy is going to contract regardless. Lower prices are the only upside for people who get pinched.
Inflating, on the other hand, is just a sneaky way for the government to reduce its real debt load while taxpayers (especially savers) bear the costs in higher prices.
There is no endgame here. The Fed will not be able to sell these agency and treasury notes when serious inflation appears. The prices of these notes will plummet as their yields and other interest rates generally skyrocket. This will not end well.
Lower prices are the only upside for people who get pinched.
What about a lower debt burden for all those who owe on cars, homes, etc. For he vast majority of people, what they will loose from inflation will be dwarfed by what they gain from inflating their debts away.
This will not end well.
I don't know. I'm about to lever up and make a big move into real estate, at astonishingly low interest rates. I'll remodel with cash before the inflation hits, then I'll inflate my debt away, possibly paying it off out of a savings account that pays higher interest than I do.
Granted that almost everything the administration has done strikes me as idiotic, but their timing couldn't be better for me, and I intend to see that it does end well.
Also, re: legal tender laws, could somebody point out where the law actually says you can't use a private currency, or refuse to accept dollars? I've looked many times and I can't find it. You can get screwed on capital gains, but you can also take capital losses if you like.
"What about a lower debt burden for all those who owe on cars, homes, etc. "
Most people don't have income that automatically goes up with inflation. In real terms, your payments on debts go down, but so do your paychecks.
"I'm about to lever up and make a big move into real estate, at astonishingly low interest rates."
It doesn't matter how good of a deal you get on the loan terms if you overpay on the property. IMHO, real estate still has a long way to fall. There will be a time to buy, but not yet. I see no indicators of a bottom.
I got a screaming good deal on my student loans, but the diploma mill sheepskin was worthless. As Good Will Hunting said, you get a better return on paying overdue library book fees.
B.Spock & R.Lyman: for some reason I am drawn to your [offtopic] discourse about the real estate bottom. Here's a thought -- are you basing your forecasts on the nationwide situation, or on local? The reason I'm asking is that most people talking about the real estate bubble think in terms of the coastal metros... which I, personally, couldn't care less about. What do y'all think about real estate prices in stable areas... wink, wink... Dallas, TX? :-) We haven't really seen them drop here, only flatline.
IMHO, real estate still has a long way to fall.
I actually agree on that, but I'm buying a foreclosure from a bank trying to dump it. It's going for slightly more than the 1998 price + CPI. Accounting for the rent I would have to pay to avoid buying now (never mind the aggravation of yet another move), I'm ahead.
Bearded & Max,
I'd be very interested to hear Bearded's thoughts on the Houston/Dallas real estate market...
What about a lower debt burden for all those who owe on cars, homes, etc. For he vast majority of people, what they will loose from inflation will be dwarfed by what they gain from inflating their debts away.
Roughly speaking, 30% of the public rents. Another 20% live in homes they own free and clear. A large fraction of the rest have savings as large or larger than the unpaid balance on their mortgages. A smaller fraction, but probably still numbering in the millions, have ARM mortgages that will destroy them financially in any seriously inflationary environment.
So in general, most flesh-and-blood people will NOT do very well by inflating their debts away. Even those with significant net debt to income ratios will see their paychecks lag inflation, both fiscally and temporally, and will lose out that way.
Max: my forecasts are strictly local to Portland and Seattle. We're running at close to 4x income here, with a local historical average between 2.5 and 3. Plus we're shedding jobs including skilled jobs, so incomes aren't exactly soaring. I see bottom in about a year unless the Fed manages to jump-start inflation sooner than that.
A large fraction of the rest have savings as large or larger than the unpaid balance on their mortgages.
Yes, but the only part of that savings subject to inflation is that held in cash or bonds. If they have most of their savings in equities they are much less suspetible to inflation.
I don't know. I'm about to lever up and make a big move into real estate, at astonishingly low interest rates. I'll remodel with cash before the inflation hits, then I'll inflate my debt away, possibly paying it off out of a savings account that pays higher interest than I do.
I had a similar thought, but with a vehicle. I don't know whether we've reached a bottom yet, but ~25% below invoice and 0% financing for 4 years seemed good enough. Not that it's an investment; I just needed something to drive that I didn't have to worry about breaking down in the middle of the freeway. But I wouldn't look at a home as anything more than a place to live either. If after-tax it's lower than you'd pay renting, then sounds like a smart buy.
90's Japan is a counterexample of quantitative easing NOT followed by inflation.
Dallas and Houston real estate is not going to appreciate much if at all. It is overpriced in terms of what you could get for the same money if you chose to rent there and you wouldn't be tied to an illiquid asset. The commercial real estate market there is likely to drop substantially as vacancies rise.
If you must buy, pick small houses or REITS specializing in non-luxury properties. Swanky suburban areas like Denton are going to get see values drop, but probably not as dramatically as what happened in Pheonix.
People are going to need to get by on less. Any business that helps them do that (like Wal-Mart) will do relatively well. Small, no frills houses, condos and apartment buildings will outperform McMansions. I'd avoid commercial property like the plague.
90's Japan is a counterexample of quantitative easing NOT followed by inflation.
or by recovery.
Second the evil-Spock on that. Outlying areas and cheaper houses have been hit the hardest and are closest to bottom.
High-end and close-in has stayed inflated (er, 'retained value') the most, but is also now falling as the 'cookie' is being eaten away from the outside in.
A real price bottom is probably quite a few months away, judging by rental parity. In previous housing collapses, the bottom of the market has been marked by a long period of zero price gains, so you probably have a long time window to get in at the bottom.
This is all about investment; if you just have to have a house for some reason (e.g. wife) then you gotta do what you gotta do.
>> 90's Japan is a counterexample of quantitative easing NOT followed by inflation.
Bearded Spock rejoined:
>or by recovery.
True that.
Here's a lovely doom'n'gloom article in the Washington Monthly:
http://www.washingtonmonthly.com/features/2009/0903.galbraith.html
Synopsis:
The current Administration team is trying to 'return to normal' by saving the system of the last ten years, which is not possible.
"Max: my forecasts are strictly local to Portland and Seattle. We're running at close to 4x income here, with a local historical average between 2.5 and 3."
My dad had a property in Tigard that he bought for 40K in 1975. It sold in 2006 for 1.2 million and they bulldozed the house to the ground because they only wanted the land. That's a bubble waiting to pop. I personally know of many stories like that from Sequim, WA to Ashland OR. My grandparents house in Ashland was bought for 4K in 1965 and appraised in 2006 at 1.7 Mil.
High-end and close-in has stayed inflated (er, 'retained value') the most
Depends on what you mean by "high end." Bill Gates' neighborhood (Medina, WA) has lost 50%, vastly outstripping other areas. It makes sense though; it's the kind of neighborhood that strivers would take a neg-am to get into. Ballard...isn't. And close-in didn't run up as much unless you count "gentrifying" parts of the 'hood. The nice close-in places were already expensive.
if you just have to have a house for some reason
It's worth noting that it's nearly impossible to rent a nice place in a nice neighborhood. Those places get sold. The detached-house rental market is mostly desperately underwater owners hoping for a recovery and slumlord-owned dumps on busy roads.
BS: one of my best financial decisions ever was to overprice my house in Charlottesvile, which meant that it took longer to sell than I wanted. I arrived in Portland in Sept. 07--the very peak of the bubble. If I'd been sporting cash from a recent sale, I might have bought in right before it started to fall. As it was, I got to watch inventories and foreclosures rise while waiting for my house to sell, and decided to rent and wait it out. Lots of people still haven't gotten a clue; 3/3 on 1/4 acre in Beaverton is NOT worth $600k.
Central OR, and I suppose more distant parts of WA, too, have gotten hammered as badly as Phoenix. On of the partners here says she knew things were out of control when California "investors" bought her parents' house in Pocatello as a rental property.
I'm not sure what approach to take. It may make sense to do some "extreme" fiscal measures, UNTIL the economy shows some signs of coming out of this free-fall. Then, we can think about the long-term value of the dollar. For now, with about 600,000 initial unemployment claims every week, it may not be a bad idea to flood the economy with, well, printed money. If the middle class shrinks much further, I'm not sure what the value of the dollar will be long-term anyway. Somehow, I'm not sure if the GDP statistics are telling the whole story.
B.Spock: I definitely hear you about commercial property... for the last 2 years I couldn't make heads or tails of all this construction around me -- while other strip malls stay half empty.
And why, exactly, would a bank need a branch on every corner? Who even goes to a branch office these days, other than to drive by an ATM? But these damn things have been threatening to replace gas stations 'round here for a while..
Bearded,
So, I can't figure out how your can thinkn that oil will hit $200 a barrel and real estate prices in Houston/Dallas will fall...
So, I can't figure out how your can thinkn that oil will hit $200 a barrel and real estate prices in Houston/Dallas will fall...
I didn't say prices would fall. I wrote:
"Dallas and Houston real estate is not going to appreciate much if at all."
I also never predicted oil at $200/bbl. Housing may fall and oil may hit $200, but I don't know that. People in the oil field have learned the hard way that making long term investment decisions based on short term oil prices can be expensive.
I honestly don't think oil will go that high anytime soon unless (God forbid) there is another war. The demand destruction overpowers the currency debasement.
The demand destruction overpowers the currency debasement.
Then prices will remain stable. Or are you infavor of massive deflation?
Bearded,
Or are you saying we're going to have massive inflation with commodity and real estate prices lower than they were a year ago....? What will go up then... wages?
Pardon me Mr. Spock but what you're saying isn't logical...
jmo, you need to look at the context. Oil is going to go up, but not to the level of $200/bbl, unless certain very bad things happen.
I am in favor of a hands-off policy that would likely include massive deflation. This is what the Fed and Harding did in 1921 and a contraction much worse the the '29 crash ended in two years. The reason why it's called the roaring twenties and not the lost decade is because capitalism was allowed to work.
Bearded,
Then when you talk about "hyperflation" what kind of numbers are you talkin about? 8% a year 25% a week?
Bearded,
Also, you "massive defflation" policy would only payoff for government employees. Everyone else is going to get laid off and have to eventually find a much lower paying job. Why would you be in favor of a plan that only helps beauracrats?
Hyperinflation: The definition used by most economists is "an inflationary cycle without any tendency toward equilibrium.
I can't make any predictions about the numbers unless I know how much quantitative easing Bernanke is going to provide. I doubt even he knows that.
The slope is approaching verticality.
I don't think hyperinflation is necessarily imminent. It may come after a prolonged period of stagflation. I just know that it's closer than it was yesterday.
"Why would you be in favor of a plan that only helps beauracrats?"
Most people don't see gov't employees as the parasites they are. If deflation illuminates that fact, then we are closer to doing something about it.
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants."
- Thomas Jefferson.
Here's a bureaucrat looting the small banks to prop up the big zombies:
From Bloomberg-
Federal Deposit Insurance Corp. Chairman Sheila Bair said a one-time fee to prop up deposit insurance is needed to maintain a “stable banking system,” as she sought to quell opposition from community bankers.
“Even though this increase comes at a difficult time, I strongly believe that keeping deposit insurance industry-funded will be better for you and your customers when this crisis is over,” Bair said today at the Independent Community Bankers of America conference in Phoenix.
http://bloomberg.com/apps/news?pid=20601087&sid=a1SWwj9TkO64&refer=home
Real world results of Fed printing were on display this week. The Feds program to buy up mortgage backed securities has been running all year I think but while they have been making the purchases they had not been settling them, until now. From last Thursdat through this Wednesday they settled $167 billion of them.
Instant liquidity into the financial sphere. Several more trillion like that if it were to stay in the financial sphere would make the banks going concerns again so they could lend us money again. Oh joy. If it starts to leak out as it is likely to do there will probably be some little bubbles in various assets.
Just thank God that none of that printed money will fall into the hands of a citizen who is likey to use it to buy beer and sit on the porch all day.
So are you saying small banks SHOULDN'T be paying FDIC insurance premiums?
Isn't it correct that ALL banks were not paying FDIC premiums for an extended period in the last decade?
"So are you saying small banks SHOULDN'T be paying FDIC insurance premiums?"
Small banks in good shape should continue to pay the same premiums as before. It's unfair to penalize them because other banks have been reckless. It takes money from the well-run banks and funnels it to the ones that aren't.
Big banks use their market clout and economies of scale to lure business from the community banks. They make huge profits that otherwise would go to the small banks. Then when they screw up, they get bailed out by the government because they are too big to fail. on top of that, their competitors are forced to help prop them up so they can steal business from the little guy when the good time again roll.
If I keep a good driving record, should my car insurance rate be raised when other drivers wreck?
FDIC is broke. It is underfunded because it was mismanaged. It was mismanaged because it is a government program. Bair knows this is unfair, but she has to choose between sticking it to the small banks or getting the FDIC itself bailed out. She is choosing to do both. Jacking up premiums now is like jacking up hurricane insurance when one is bearing down on us. It defeats the whole purpose of having insurance.
The FDIC doesn't reduce the risk of bank runs. It just makes sure that they happen all at once and the destruction is total. That is the systemic collapse scenario that was used as the justification for the TARP program and others.
The moral hazard of the FDIC is that people trust banks more than they should because they believed those deposits are adequately insured. With less than 0.5% reserve ratio to covered deposits, that belief is naive.
The FDIC doesn't reduce the risk of bank runs.
Really? I find that rather hard to believe. The gov't may not be able to everything but they can sure as hell guraranty that when you give $100 to the bank you will get $100 back.
The gov't may not be able to everything but they can sure as hell guraranty that when you give $100 to the bank you will get $100 back.
They can until they can't. The fund needs 200 times as much money as it now has to make good on that guarantee in the event of a nation-wide (or world-wide) run on the banks.
That's not a terribly unlikely scenario. That is exactly the situation that Paulson said was immanent when he sold congress that steaming pile of turd we call the TARP.
Risk is a function of the probability of an event occuring and its impact.
Even if FDIC might make a run on a some banks less likely, if one happens en masse it's because no one believes either the bank or the government can cover their deposits (and they'd be right, absent massive inflation).
The existence of FDIC makes the entire banking industry quasi-public. It's moronic. And we're surprised banks were so over-leveraged?
The hits just keep on coming!!
From the Washington Post:
Deteriorating economic conditions will cause the federal deficit to soar past $1.8 trillion this year and leave the nation wallowing in a sea of red ink far deeper than the White House had previously estimated, congressional budget analysts said today.
...
the CBO predicts that the nation's annual operating deficit would never drop below 4 percent of the overall economy over the next decade, a level administration officials have said is unsustainable because the national debt would grow too rapidly.
By the CBO's estimate, for example, the nation's debt would grow to 82 percent of the overall economy by 2019 under Obama's policies, compared with a pre-recession average of 40 percent.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/20/AR2009032001820.html?hpid=topnews
Since T bills are now effectively junk bonds, I nominate Michael Milken as undersecretary of the Treasury.
"By the CBO's estimate, for example, the nation's debt would grow to 82 percent of the overall economy by 2019 under Obama's policies, compared with a pre-recession average of 40 percent."
So, we end up with the same debt level as France or Germany and less than half the level of Japan. Sure, that will totally cause the end of the world.
Damn. Two years ago, I'd have read Bearded Spock's comment above about the FDIC and said "obvious crackpot, couldn't happen, nothing to see here." Now, it just looks unlikely, not impossible.
It's sort-of like the way we now kind-of glaze over when we see discussions of some new financial crisis band-aid that's "only" spending a couple hundred billion dollars. What a waste of time--why do they bother covering that penny-ante stuff?
They can until they can't. The fund needs 200 times as much money as it now has to make good on that guarantee in the event of a nation-wide (or world-wide) run on the banks.
The government would simply print the needed money to make small savers whole. It would be able to get away with such an action because doing so would hardly be inflationary. After all, under such a scenario, the printing press would hardly be making a net addition to the money supply; rather, it would be merely replacing destroyed money.
Has anyone checked Milken's recent tax returns?
I think the CBO is being extremely conservative. They were the one's who predicted the Iraq war would cost 100 Billion dollars.
The war is actually costing around a Trillion (with a "T"!) unless you use Joe Stiglitz' 3T number.
That sounds like a gross underestimate until you discover that the pentagon predicted the war would only cost ten billion dollars. They were only off by a factor of 100, so maybe we can trust the White House figures more.
Chopper, considering all the problems unwinding AIG's positions, do you really think that the depositors will sit back calmly and wait weeks/months/years to get their money back? AIG is ONE INSURANCE COMPANY.
We are talking about all the banks in the U.S. The FDIC didn't even have the manpower to make Indy Mac depositors whole without hiring temps. The disruption would be catastrophic. Payrolls would not be met. There would be riots and looting at a minimum, which would require martial law.
Bearded,
If they banks are insolvent then the fed can loan them the money. All that needs to happen for direct deposit to go through is for the fed to create the required entry in the banks account.
There would be riots and looting at a minimum, which would require martial law.
What the are you talking about? There is no mechanism by which this could happen.
Please explain how this would happen given the ability of the fed to make infinate amounts of money available in an instant. You forget that the fed doesn't need to "print" physical money anymore it just has to make the required data entry.
"That sounds like a gross underestimate until you discover that the pentagon predicted the war would only cost ten billion dollars."
Actually people with a clear political agenda cooked the books on the war in Iraq. They simply lied and in certain cases convinced themselves it would take too much. Shinseki was realistic about the war's cost and so he got the boot.
"AIG is ONE INSURANCE COMPANY."
In much the same way that earth is "ONE PLANET."
BSD
And when the depositors demand their money in cash?
many of them would, and it would take time to print because there just ain't nearly enough to go around. Then they'd have to deliver it to the banks...probably in helicopters.
Aside from the cash problem, The Fed can make electronic money in an instant, but it can't make a loan in an instant. They would need to figure out how much to send to everybody. There is no automatic mechanism to do this. By the time they figured out how to do it, Foreign capital would flee the country like air out a space station hull breach. It would take decades to recover if ever.
Actually people with a clear political agenda cooked the books on the war in Iraq.
Brian are you retarded? You don't think that the White House budget has a clear political agenda?
Is there any reason to trust there estimates more than the Pentagon's? Any reason at all?
grow a brain.
Is there any reason to trust there estimates more than the Pentagon's? Any reason at all?
Because B.O. would never lie to us, you heretic.
Bearded,
As long as my debit card and electronic bill pay work why would I need cash. The fed can ensure that both keep working.
That's great, jmo, but every cash business in the country would shut down. The ripple effects would hurt everybody and kill some businesses altogether.
Physical cash would trade at a premium over electronic money the same way civil war gold traded at a premium over banknotes.
We would be forced to barter and we'd lose efficiency because of the double coincidence of wants requirement.
The war in Iraq hasn't cost us anywhere near a trillion dollars. You can only arrive at that figure if you add in costs we would have been paying anyway, like salaries for the soldiers involved.
Practice, rather, determines the value of theory. A theory is true when it works in practice, false when it does not.
Now that the printing press is humming it is going to be almost impossible to shut down. We have arrived at the point of the last bubble. US Treasuries, with junior bubbles in anything he government is buying.
The Fed will print to keep up the demand but they will soon find they cannot stop.
If only the true conservatives would have stood across the road of history that was Greenspan's Federal Reserve and said, enough. In 91 93 or 95 97 or 98. No, they cheered. Then came 2001 and beyond. Throttle to the floorboard of the credit machine. Onward ever onward faster and faster. More credit was all that was needed to make things good and right. Each bubble requiring more unproductive credit, to buy stuff.
Bernanke did what he had to do and what he said he would do. It's a monumental mistake but it's the only path he knows. In a month or a season or a year or two there will be no takers for the 12 or 20 trillion outstanding Treasuries much less any new ones. The Feds 'assets' a pile of shit. Maybe it will be 4 or 10 years, with wild inflationary bouts along the way. Or it just may all crumble first. The biggest bubble of all will have burst.
That's great, jmo, but every cash business in the country would shut down.
I'm pretty sure they would just break down and start taking debit cards rather than "shut down."
HOUSTON — The decline in crude oil prices gets all the headlines, but the first globalized natural gas glut in history is driving an even more drastic collapse in the cost of gas that cooks food, heats homes and runs factories in the United States and many other countries.
With industrial and utility use of natural gas declining, gas prices in the United States have already declined by two-thirds since the summer.
Inflation - yeh that's what's keeping me up...
Re: Small banks in good shape should continue to pay the same premiums as before. It's unfair to penalize them because other banks have been reckless. It takes money from the well-run banks and funnels it to the ones that aren't.
That's the way insurance works. After the Year of Four Hurricanes home owners all over Florida saw their premiums skyrocket, even if they were no where near the places that Charlie, Ivan, Francis and Jeannie savaged.
Re: The FDIC doesn't reduce the risk of bank runs. It just makes sure that they happen all at once and the destruction is total.
There is not a single historical example to back up this statement. Even in the current situation, most banks remain sound and are in no danger of collapse.
Re: And when the depositors demand their money in cash?
We no longer have a cash economy, or even one that could exist on a cash only basis. Moreover, in the sort of doomsday scenario you envision there would be no point in demanding cash since the cash itself would also be worthless.
Re: That's great, jmo, but every cash business in the country would shut down.
How many cash-only businesses are there? Even Taco Bell and the local Dollar Store take plastic now.
Considering that natural gas has been so over-priced in recent years that many people locally, I don't know about nationally, have been switching from natural gas to electric (of all things) for hot water and heating, I'm not all that surprised, or dismayed, that it's being over-produced and its price is dropping.
Many real small businesses, not national chains like Taco Bell and Dollar Store, can't afford the costs of taking plastic. Competition from Dollar Store, Walmart, Staples, and Lowe's forces them to keep down prices, and without the buying power to hold down the costs of the merchandise they buy, and the ability to spread the costs of regulation over millions of purchases, they have to cut costs where they can, which includes the overhead of credit/debit machines and processing.
Many real small businesses, not national chains like Taco Bell and Dollar Store, can't afford the costs of taking plastic.
What cost? It's like $10 a month, plus maybe $100 of equipment if you're brick-and-mortar.
How many local stores bigger than a popsicle stand don't take plastic? Besides drug dealers, I mean.
Throttle to the floorboard of the credit machine.
Ah yes, if only we could return to the good old days when assets kept their value safely locked inside them and no one could borrow money against them to buy houses, cars, or anything else. You know, like in Haiti.
There would obviously be business disruptions if cash suddenly became scarce, but the bigf problem is the time lag between when the bank run occurs and when the FDIC made the depositors whole. During that interim, even debit cards wouldn't work. Many credit cards wouldn't either. This disruption would be sufficient to trigger a huge outflow of foreign capital that may never be recovered.
Re: There would obviously be business disruptions if cash suddenly became scarce, but the bigf problem is the time lag between when the bank run occurs and when the FDIC made the depositors whole.
You are assuming that every bank fails simultaneously. As I noted above the majority of banks are in no danger of failure (even in the 30s a large number of banks remained sound), and to the extent that banks are failing and will be failing this will be spaced out across time, discommoding very few people at any given time. The only scenario I can conceive of where every bank in the world collapses simultaneously would be one involving a physical catastrophe where the entire socioeconomic infrastructure (and much else besides) goes down: as in nuclear war or a giant asteroid strike.
The FDIC is getting a $500 billion chunk of money from Congress anyhow. This was partly necessary because FDIC insurance fees were not collected for a decade ("no need" because the FDIC fund was making enough money in the market.)
With about 7 trillion in total US bank deposits (1.5 trillion in savings institutions) $500 billion goes to cover a good deal of consumer-level bank running.
As for the FDIC being incompetent by virtue of the fact that it is a government, and causing moral hazard to banks (enabling them to take excessive risk (how does that work?!?)) I don't buy that. FDIC and bank regulation kept the bank business safe, conservative, and profitable for sixty years, until about the time Reagan took office. The S&L fiasco was a fiasco of deregulation and the mortgage meltdown was a result of the SEC refusing to oversee mortgages.
Another deregulative dodge was financial institutions being permitted to choose their overseer, and AIG (among others) chose the small toothless Office of Thrift Supervision.
There was a criminal lack of regulation-at the Fed. The Fed is not regulated. There has never been an audit. The real estate bubble would not have occured without Greenspan's low interest rates.
Government is a poor regulator. They don't have the right incentives to do a good job. Arthur Anderson went out of business for failing to regulate Enron. The SEC paid no penalty for allowing the Madoff scheme. As with public schools, government is not held accountable for its failures as much as the private sector is.
FDIC insurance creates moral hazard because it encourages excessive risk taking. Depositors do not hold their banks to high standards because they assume that they will get bailed out if the bank makes some dumb mistake like levering up 30 to one buying mortgage-backed CDOs.
After the initial self-congratulations, this Schiff talk (warning: an hour and 16 mins) is engrossing. Primarily, he describes bubble behavior, expectations, and psychology in 90's tech, in 00's housing, and in the dollar right now, why they're all related and where we're headed thanks to Bernanke, et al.
http://www.youtube.com/watch?v=EgMclXX5msc
This is so crazy. Bernanke and the rest of them aren't willing to face the truth, let the whole bubble burst, and that includes the 'too big to fail' category, so they're going to try and print their way out this catastrophe and believe this will maintain the status quo.
Let me remind you, that the Mayan Calendar ends in 2012, that might be just about enough time for this last gasp of insanity to work itself out and destroy what is left of the global economy.
jmo: hysteresis.
Anything the fed does takes 18 months or so to do anything.
Derek
The one thing that is abundtantly clear is that all of the people on this board talking about inflation know not what they speak.
These are the same people who were less than 2 weeks ago talking about our deflationary spiral. I'm no economist but I'm pretty certain you can't at once have chronic inflation and be in a deflationary spiral.
k1
@k1
Of which people do you speak? I'm pretty certain that most of the posters who are talking "inflation" now were talking it over the past several months.
Unless you're aware of some posts I haven't seen. Not saying it didn't happen mind you - Just saying I haven't seen it.
And bear in mind that no one "owns" their posting name here. Case in point, the constant "Basic Fact" post/counter-post...
"I'm no economist but I'm pretty certain you can't at once have chronic inflation and be in a deflationary spiral."
It is possible to have price inflation and monetary contraction simultaneously. It is also possible to have lowering prices and monetary expansion at the same time. Eventually one will win out over the other and either a new equilibrium will be reached or we get into a death spiral up or down.
I believe that inflation is the greater risk. I have said that all along. The monetization of government debt is accelerating. There is no politically viable alternative to printing money.
There is also a small but real chance of a deflation death spiral is credit contraction outpaces government spending and Fed credit operations. I doubt this will happen though because it is the only one of all these very bad scenarios that the guys in charge are taking seriously.
A country-wide bank run is also an unlikely but real possibility. It's not for nothing that the FDIC just was granted a 500 billion dollar line of credit. There is no mechanism in place to rapidly cover deposits if a massive multibank run occurs.
The disruption would send shock waves throughout the entire economy and trigger a mass exodus of foreign capital. GDP would fall, government would rise as a percentage of GDP, Government bonds would lose their AAA credit rating and then things would really get ugly.
There is no mechanism in place to rapidly cover deposits if a massive multibank run occurs.
Really? That's not how I understand it.... Can you point me to the relevant info?
Just in case you are curious about the stench wafting in from the general direction of the Eastern seaboard, Rolling Stone just published an article that rips the floorboards off the bailouts and exposes the rotting corpses underneath.
Basically the government is a wholly owned subsidiary of Goldman Sachs. Happy tax season, suckers.
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print
This story is the most important thing you will read this year. Author Matt Taibbi will either get a Pulitzer or a bullet in the head for writing it.
As I noted above the majority of banks are in no danger of failure (even in the 30s a large number of banks remained sound), and to the extent that banks are failing and will be failing this will be spaced out across time, discommoding very few people at any given time.
True, many smaller banks are doing quite well.
This is exactly why they shouldn't have allowed these mega-banks to get so large. No enterprise should ever be "too big to fail," the whole idea of such unfailable businesses existing at all is anathema to the idea of how free market economics is supposed to work. Decisions must have consequences in order for a market to function, there can't be this implicit assumption that no matter how badly they screw up the gov't will save them.
Taibbi makes a few good points, but ignores the fact the whole crisis was caused by regulators like Barney Frank demanding banks give loans to poor credit risks, and allowing them to ignore the underlying risks, all in pursuit of social justice.
And the notion we're bailing out rich bankers is just left-wing nonsense; for the most part, those are the people losing everything. The AIG bailout is to keep the company from cancelling millions of insurance contratcs for ordinary people, while AIG stockholders are left with virtually nothing. The bailout may be a bad decision, but it's not going into the pockets of bankers.
Bearded-
1. Are monetary contraction and deflation the same thing or is their a nuance? I don't doubt your analysis, but I know deflation from the price perspective as simply negative inflation (that is a sustained decrease in prices).
2. Also you mention that the deflation death spiral is less likely b/c it's the only thing the Fed is taking seriously, but they're using inflation to combat it. Again I'm not as nuanced in economics as some here but it seems to me that the Fed is simply using inflation to combat deflation because deflation is more nefarious and they have better ways to fight inflation, namely raising interest rates.
3. I actually think we're passed the even most miniscule risk of a bank run. This was a real possibility back in September, but the masses (who would ultimately be responsible for the bank run) are somewhat initiated and as long as they have someone telling them their 5, 10 or 30k worth of savings is insured their fine.
Col Sanders-
I may have hyperbolized the whole "2 weeks" and "everyone" thing but I hope you take my point. There have been really good practical conversations on here about negative feedback loop and deflation which is what WE'RE actually expereiencing. Then there have been all of these academic discussions about inflation, chicago, austrian, Keynes, Peter Schiff, etc and it just seems a little impractical that all of these smart people would be willing to forgo dealing with an INTENDED consequence (inflation) in 12-18 months if it could help stem our current slide (deflation) which is much more nefarious and PRESENT.
Now, I know for Megan and her boyfriend or for Matt Yglesias deflation is a good thing because they can get their new house, apple computer or 2009 Land Rover for $2.75 total, but the deflationary spiral is vicious and I'm willing to deal with inflation in a year if it means that salaries aren't reduced 95% and unemployment skyrockets just so Megan can buy her house for pennies on the dollar.
To summarize, IN PRACTICALITY (not academia) I still am not convinced that you can have inflation and deflation at once. I am convinced that deflation is much more intractable and nefarious. I am convinced that trying to induce inflation can stem deflation. Therefore I am convinced that trying to induce inflation is necessary at this point in time.
k1
jmo,
Please read the latest statistics regarding the CPI.
http://www.bls.gov/news.release/cpi.nr0.htm
We are not experiencing deflation, and it seems that we avoided the dreaded spiral that you pine about. In the last 3 months, the only product to experience price level decrease is energy. Mostly due to a bubble which long burst, and we are now experiencing those prices increase healthily over the last 2 months. Changes in energy demand will only go so far, as these is some base level of energy consumption which will be consumed. The 3 month price level for all other goods (even food)increased or remained the same. The year-over-year general price level increase is positive.
But you ignore the threats of future inflation at your our own peril. Our monetary base has been increased to a level unseen in history. Our government is issuing debt at extremely high levels which it cannot repay. Banks will lend again. Consumer will spend again. When they do, the multipliers will take effect and we will have to undue that damage and it will be severe. The only prescription will be excessive interest rates.
Please read the latest statistics regarding the CPI.
What should I belive the CPI or my own lying eyes? Everything I consume from cars to clothes to food to vacations, gas is much cheaper now that it was a year ago.
Should I believe statistics or your lying eyes? Statistics.
I spend and save the same today as I did one year ago. Your anecdotal "evidence" versus mine.
I spend and save the same today as I did one year ago. Your anecdotal "evidence" versus mine.
You spend the same on gas for your car and fuel for your home? Wow....you must be right then.
Deflation is just the process of an economy getting more efficient at delivering goods and services. Around 1909, it was so much harder to make food and clothes and housing that paying for those things required Americans to work many, many more hours for those things than they do today. So in real terms, deflation is always happening, and we should be damn glad it is because that's where most of our lifestyle improvements come from.
Of course, the other side of deflation is that it can drive less efficient competitors out of business. Keeping them propped up with mildly inflationary monetary policy probably isn't the worst thing we could do right now, but I'm still skeptical any of this intervention was necssary or healthy in the long run.
Are monetary contraction and deflation the same thing or is their a nuance?
Monetary deflation is a contraction in the money supply. Bank lending multiplies the amount of money so a money supply contraction is usually the result of a credit contraction.
Price deflation is simply prices generally going down across the whole economy. It is usually the result of monetary contraction which in turn is the result of credit contraction. There are exceptions, but that is beyond the scope of this discussion.
The government and the Fed are not inflating to counter deflation and unemployment. That is a pretext. Inflation benefits debtors at the expense of creditors as loans are repaid with less valuable dollars. Who is the largest debtor in the world? the USG. Who are the largest private debtors? Goldman Sacks and the other big financials. This is a bailout of the rich by the poor.
"while in theory, theory is the same as practice, in practice, they differ."
Megan, just wanted to say that that is a great quote. I used it as my Quote of the Day.
http://talentedearthquake.blogspot.com/2009/03/quote-of-day_22.html
You spend the same on gas for your car and fuel for your home? Wow....you must be right then.
I never suggested that energy prices have not decreased year-over-year. In fact, I wrote nearly as much and stated that energy was the one sector with sustained price decreases. But those price decreases were largely isolated to months Aug-Dec and have since ceased their downward slide and have increased over the last two months.
My statement was that general price levels have not changed over the last year and have actually increased over the last 3 months especially when excluding energy prices in December, suggesting that we have likely avoided this deflationary spiral. The last 2 months of data show that general price levels are rising.
As for the FDIC being incompetent by virtue of the fact that it is a government, and causing moral hazard to banks (enabling them to take excessive risk (how does that work?!?)) I don't buy that. FDIC and bank regulation kept the bank business safe, conservative, and profitable for sixty years, until about the time Reagan took office.
There is good historical evidence to say that deposit insurance has given incentive to banking institutions to take more risk by examining balance sheets before and after deposit insurance. Leverage ratios before deposit insurance were about 4:1, while afterward and presently is about 12:1. With federal deposit insurance, bank managers can take excessive risk knowing that the government will protect deposits. Government safety nets give incentives to institutions to become as large as possible, knowing that being large enough will pose enough systematic risk so that government bailouts are assured. Thus bank managers can take excessive risks and maybe even keep their jobs when those risks prove excessive.
Several decades ago, the FDIC introduced the largest inflation adjusted insurance deposit limit increase in history, from $40,000 to $100,000. Surely, back then, we didn't need to insure deposits of up to $100,000? This was not the average depositor that was being insured. Thus, this increase benefitted small banks which relied heavily on large deposits. The problem was even worse then since insurance premiums were paid uniformally by all member banks. In 1991, steps were taken so that premiums depend on leverage ratios. Of the banks that failed in the 1980's, most were small banks which took excessive risk in which the taxpayers eventually settled. Funny that...
By the way, that increase in the deposit limit occurred in 1980. When did Reagan's term begin?
FDIC and bank regulation kept the bank business safe, conservative, and profitable for sixty years, until about the time Reagan took office
Nitpicking, but that's about 45 years.
TallDave-
What is your long term? And what makes you so confident that markets return in any recognizable form in that time that puts us in a better position than if we'd not bailed out anyone?
Do you believe the short term pain of having done nothing will be worse than the long term pain of inflation and deficits?
It seems that Bernanke is saying we've seen both up close and personal and it's better to be healthy and deal with inflation and deficits as opposed to being sick with the only cure being another MASSIVE WAR (for those who believe WPA was worthless.)
k1
k1
You have it exactly backwards, k1. Wealth-destroying companies are like cancer cells. They must be allowed to fail or they will kill what is healthy around them.
Japan didn't allow sick banks to fail and they have gone 16 years without a recovery. Those assets need to be taken away from those who demonstrate an inability to manage them directed toward more productive uses.
We can't let the malignancies metastasize. Chemo patients look like they are sicker than those who refuse the treatment, but in the long run they are much better off.
Recessions are necessary to clear out the malinvestment. Without letting them run their course, true recovery is impossible. They don't call it a correction for nothing.
During the first great depression, people started making their own scrip to facilitate trade in a society that was sinking to a barter economy. It wasn't counterfeiting, because it didn't claim to be from the government.
It might be a good idea to read up on it and start designing your own.
I read a book called Army of Davids once.. . .
I'm calling mine "fifty cent bills" aka Half-AST bucks.
"But most consumers and businesses in America are not set up to take large payments in cash."
Oh yeah?
Note to Bernanke, please employ me as a test case of this assertion.
Really.
molon labe, montani semper liberi, & para fides paternae patri
"When cash money gets hoarded by foreigners, it actually is a big plus for the U.S. because those bills (called eurodollars) are de facto loans that we will never have to repay."
That could only be true if those Eurodollars end up useless like Confederate money found stuffed in the attic.
Which I submit is not actually a rosy scenario.
Yours, Tom Perkins,
ml, msl, & pfpp
Bearded-
I understand corrections coming out of a recession, but it seems to me that most people think this has the potential to be a great depression.
In which case I simply ask what makes people so sure that we correct or return to anything even closely resembling a global market economy after entering into one. I know we've seen recession recoveries and I agree with your course of action on those.
But it seems to me that most people believe the depression didn't correct on it's own and the only cure was to kill millions of able bodied young men and destroy billions of assets worldwide globally so that we had something to rebuild and less than enough men to do it.
So I'll ask you, if we do spiral into a depression how are you sure we return to anything resembling a market economy? In theory doesn't a vicious cycle just get worse and worse the fewer non govt dollars we have cycling through the economy?
k1
Bearded,
Who is the largest debtor in the world? the USG.
It's actually the Japanese gov't.
One of the principal flaws in your arguments is that you have an insufficient understanding of nations other than the US.
Um, theory is not the same as practice, even in theory. Hence the different words.
BTW, it's a rather busy Monday morning. Where the f*** is McArdle?
I can only imagine skipping over a trillion dollars as if its nothing and not even bothering with the toxic buyback means she's either job hunting, or should be.
That goes for a lot of us.
Who is the largest debtor in the world? the USG.
It's actually the Japanese gov't.
One of the principal flaws in your arguments is that you have an insufficient understanding of nations other than the US.
You are wrong, jmo. The Japanese national debt stands at 7.1 trillion dollars. U.S. debt is 11 trillion dollars. japan has a march larger debt as a percentage of GDP, but that's not the same thing.
http://www.freerepublic.com/focus/f-news/1489944/posts
If you are going to be nitpicky, get your facts straight.
So I'll ask you, if we do spiral into a depression how are you sure we return to anything resembling a market economy? In theory doesn't a vicious cycle just get worse and worse the fewer non govt dollars we have cycling through the economy?
That's a good question. It's analogous to asking if we can be sure that a person will get healthy after chemotherapy. We can't be sure, but we know that if there is no treatment, the cancer will almost certainly be fatal. It's a horrible dilemma, but we have no good options. IMO, the government itself is the biggest threat to our future safety and prosperity. If we can't put it back on it's leash, then it should be put to sleep.
My take on the great depression and WWII is that FDR got so distracted by the war that he neglected to continue destroying the economy (at least he wasn't as active in doing so as before). Some of the formerly unemployed did get killed off which actually helped in a perverse sort of way. There was also substantially LESS personal consumption when everything got rationed. Contrary to John Maynard Keynes, that was a good thing and contributed to the recovery. The idea that the war itself was some giant stimulus is simply the broken glass fallacy writ large.
Bearded,
You've included debt the gov't owes to itself.
BTW, it's a rather busy Monday morning. Where the f*** is McArdle?
Probably over at the Cato Institute, getting her marching orders and talking points.
Bearded,
Who is the largest debtor in the world? the USG.
It's actually the Japanese gov't.
Nice try, jmo- the Japanese debt as of December 2008 was 846 trillion, which is about $8.72 trillion USD at 97 JPY/USD.
http://www.mof.go.jp/english/gbb/e2012.htm
Compare to US gov't debt of $11 trillion, give or take.
http://perotcharts.com/us-national-debt-clock/
US Gov't debt held by the public is roughly $6.74 trillion.
"You've included debt the gov't owes to itself."
Considering that I didn't include unfunded liabilities like social security and medicare (>50 trillion), nor the 5 trillion dollar backstops on Fanny Mae and Freddy Mac held mortgages, I think I'm being pretty conservative.
Bearded,
Japan's unfunded pension liablities are much higher than ours and you know that.
Japan's unfunded pension liabilities are much higher than ours and you know that.
Again, only as a percentage of GDP. What makes you think that Fed-held treasuries shouldn't count anyway? They still have to pay interest and theoretically the fed could sell them on the open market. Technically the Fed isn't part of the government. It is owned by the member banks and is not subject to the FOIA, for example.
As long as we are discussing bonds, we should be paying attention to the increasing bond spreads of the banks. The equities markets are booming, but bond traders are demanding relatively high interest rates. This is an indication that the bond market is pricing in a greater risk of bank failures.
http://bloomberg.com/apps/news?pid=20601087&sid=atXquDZTnN2U&refer=home
It also suggests that this bear market rally might sputter out soon.
Bearded,
It's not the fed held debt that screws up the numbers it's the Social Security Trust Fund. Most other countries have massive unfunded pension liabilities but they don't include them in their debt numbers like we do.
While Megan is AWOL, some serious sh1t is going down. Krugman has publicly slammed the Geithner plan. The slate.com servers are jammed, so I can't get the story directly. Here's the link to the Reuters coverage:
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE52M4SS20090323
On one of her previous posts, Megan mentions not being around today.
Spock, whats your take on this? He makes some pretty convincing arguments that the current spending won't result in hyperinflation.
http://futronomics.blogspot.com/2009/03/hyperinflation-is-impossible.html
http://futronomics.blogspot.com/2009/03/hyperinflation-is-impossible-addendum.html
I wrote a lengthy response to this that I was unable to post thanks to the registration switchover.
Here's the shorter version. Futronomics gets the China angle almost perfectly backward. The problem we are worried about is not PRICE inflation. Price inflation is (usually) a symptom of monetary expansion. It's not hinese consumers pushing demand for goods, services, commodities, etc that will cause inflation. It Is the reluctance or refusal of the Chinese to reinvest their trade surpluses in U.S. treasuries that will set the chain reaction in motion.
With a greatly diminished market for government debt, the government will either have to reduce spending or sell to the Fed to finance operations. They have no demonstrated inclination to do the former.
Selling debt to the fed amounts to conjuring money out of thin air.
Today we had inflation, in stocks. See how easy it is. The Fed settled on $167 billion of MBS purchases in the week ending last Wednesday and one suspects from the action there was more of that and from the alphebet soup programs as well over the last week and probably today.
So things can inflate on a very short term or even intermediate term basis as most other things deflate. Any free money, excess liquidity, is going to flow into something. Especially now more than ever as the universe of inflating assets shrinks and desperate gamers try to make their year, or their life, before the wheels come totally off.
It could be oil or gold or silver or corn next week. Whatever it is it is sure to be things that most people don't own or will be in things they need. So gasoline will probably by $3 plus this summer and grocery prices are absolutely refusing to come down.
The things people need are pretty sure to go up in price, vs income anyway. How in the hell else are we going to square the circle of the crushing systematic debt load? Somebody is going to have to try and pay it off and it sure as hell isn't going to be the Pigmen. Cripes, they need our money too. Tim says the FDIC is going to borrow it. From who I don't know. He want's to coflate the banksters with poor schumck depositors so maybe he can squeeze a bit more out of congress I guess.
McArdle, this is the biggest day for financial news and analysis in the last 3 months. You better be sick or dead.