Bernanke Admits Printing $1.3 Trillion Out Of Thin Air

Discussion in 'Economics' started by bearice, May 2, 2010.

  1. CClement

    CClement

    Simply wanted to hear your opinion whether or not you think the dollar would fall against Euro because of all this. I'm not sure if it could be a factor that should be considered when it comes to staying in a short position on EUR/USD. Of course I could close the position now, but with a year-end target that says around 1.20 it would be stupid to consider closing it, if this thing with FED shouldn't be considered a threat to my position.

    Thanks
     
    #41     May 5, 2010
  2. piezoe

    piezoe

    Silly me! And here I thought prices of goods and services had something to do with inflation. What a fool I am. I wish the Fed was as smart as you. Pleased to learn we may not be doomed to inflation after all. Just hoping there will be many more 911GT Porsches sold at 50k than Loaves of Bread at $3.

     
    #42     May 5, 2010
  3. Ed Breen

    Ed Breen

    Pie, if you take apart the price change index's and look at the components you will see that a lot of things, besides houses are selling at prices lower than last year. If you follow Milton Friedman, he would say that inflation is always and only a monetary event, or something like that. What he means is that the change, the increase, in the price of all goods and services over time is driven by money supply increase. Of course there is allowance for variation in price of some goods and services that fluctuate according to fiscal forces of supply and demand, but the idea is that over time supply and demand balanace out and the price change indexes revert to the mean excpet for the aggregate increase caused by money supply. I think that idea is flawed for several reasons including the lack of demand measure...money supply should increase with demand (gowth of economic activity, birth of more people) and money supply should balance the supply and demand for money...but Milton had no demand metric, and the idea assumes that money is a tangible thing like it was 200 years ago when the Quantity theory of money was born...but now its not, its a digit on a ledger...the idea of quantity has become abstract...like they don't really print it anymore...the actual currency and coins in circulation is constant at about 1T...this is a theory that was created at time when there were no complex derivatives or swaps, there was no fractional reserve banking, world markets were segmented and gold was money...but we still talk about it as printing money and think about it as tangible...who's being silly.

    And lucky, thanks for the advice but I didn't fall down with yesterdays rainwater....I own six cars...one is Porshe that I have owned for 35 years and its worth half of what I originally paid for it...really has been a cheap ride...You should see my '76 Eldorado Convertible with Reagan for President, primary campaign, bumper sticker...as long as two Prius's piloted by priggish prudes sporting HOPE stickers...born in morning of an era of expanding horizons, a space program and large ideas about a positive future..but I digress...You know if you look at history you will see that there have centuries where the price level continued to revert to the mean, where there was no inflation...In the 19th and 20th centuries before the Great War, houses did not appreciate that much. You operate with a self confident tranqualized obviousness about inflation like it is a force of nature...its really a modern thing on the scale of the U.S. economy, not much older than your life I suggest, of course there are historical examples of debasement, the Spansih discovery of Gold in the New World and other inflationary episodes, but nothing the force of nature you assume. As for today and the world we trade in, the world where equities are have not increased in price from where they were in 1999, the world wear Japan is entering its second decade of deflation, I would not be so smug about practical inevitability of inflation.
     
    #43     May 5, 2010
  4. telozo

    telozo

    That is true, but you conveniently forget what Friedman said about those who profit when the money supply is increased - the banks that use it first at the old "value".
     
    #44     May 5, 2010
  5. piezoe

    piezoe

    Breen, do you think Japan is an apt comparison to the US? I don't. The primary difference being that Japan is a nation of savers and they were able to borrow from themselves. Consequently they have little incentive to inflate. The US, on the other hand, is a nation of profligate spenders whose high standard of living has been built on borrowed money. The US has tremendous incentive to inflate. It would be disastrous for the US to return to its creditors greater buying power than that borrowed!

    True enough, before fiat currency, there were numerous periods in US history going back to revolutionary times and including the Great Depression where deflation was experienced. But after 1971 we did not see periods of significant deflation, only inflation -- sometimes more, sometimes less.

    Can you imagine what would happen to living standards if for example we had to pay off our mortgages with dollars worth more in buying power than the dollars borrowed, or the sale of US assets that would ensue were the US Government to pay on debt held in other countries with dollars worth more than the dollars borrowed?

    That in a nutshell is why the Fed can not allow any significant deflation, and why it won't. The current shadowstat figures show single digit inflation in the overall US economy in spite of a few segments where there is deflation (housing, automobiles, etc.).
     
    #45     May 5, 2010
  6. Ed Breen

    Ed Breen

    Telozo, I don't follow...inflation makes debt service cheaper...at least in the Gov't debt structure and where rates are fixed for term. So, debtors get a break by paying banks back with cheaper dollars...hard to see how the banks and long bond holder's make out. On the other hand deflation causes the banks to get paid back with money more valuable that what was loaned....except they don't get paid back becuase so many debters go broke.

    It is important to understand inflation in the context of fiscal progressive taxation. During the 70's when we had raging inflation we also had a progressive tax structure that caused the government to recieve increased income during inflation by 'bracket creep.' In the 70's context, inflation was a massive tax increase on both labor and capital...the tax increase was more than the inflation COLAs could keep up with...so production declined as capital was diverted and demand for tangible assets increased as regular people sought to get rid of dollars in exchange for tangible things they could buy with leverage...Financial assets were transferred to tangible assets while the productive capacity to produce more tangible assets was starved of capital through increased taxes....vioila...inflation.

    Now, we have a flatter tax structure so the progressivity effect with inflation will not increase taxes as dramatically....but we getting a tax increase between big and bigger next year in real terms so production will be constrained by the diversion of capital to taxes...on the other hand we are not having inflation so so wages are not likely to increase at all and business investment is likely to flatten out when inventories are re-balanced to a new unleveveraged normal....this is a combination very different from the 70's...we will have reduced demand for tangible assets and we will have reduced production...which means the government will have reduced revenues but increased social support costs for a prolonged period....That is why Gov't wants inflation...but it is not happenning and revenues continue to collapse with no clue how to stimulate real private sector growth and reflation attempts trapped as excess reserves at the Fed....
     
    #46     May 5, 2010
  7. Ed Breen

    Ed Breen

    PieZoe, Yes Japan and the U.S. have important differences and behave differently...but I can still use Japan as an example of deflaiton...Japanese deflation...A symptom of deflation is the accumulation of excess reserves in the central banking system. This has only happened three times during the past century. It happened during the Great Depression, the long Deflation in Japan and now, during this crises, what Rogoff calls, The Second Great Contraction (Depression being the First). Panic of '09 was too short to develop deflationary spiral and was handled by Morgan...Deflation of '81, 82 was avoided by Tax Cuts increasing demand for money and Volker finally taking the screw off as the Peso collapse scared him.

    There was a monetary deflation in the late 1990's that was absorbed in our large and diverse economy but I think it will become realized that is was the first global financial system deflation as our currency deflation that did not effect our economy outside of manufacturing and commoditiies...blew up the small economies around the world tha were tied to the dollar, Indonesia, Russia, Argentina the Asian Finacial Crises and the distress of the Tigers. Greenspan inflated out of this after 9/11 before the deflationary effect on our economy became endemic.

    So, for comparison to now, you have to look at 1930's and Japan...and you have to explain why the money pools at the central bank.

    Inflation and deflation are processes that have behavioral componants that are self reinforcing...that is the whole expectation thing. You don't renegotiate all your contracts becuase the gold price moves up in one day...you have to be convinced that the price is up to stay and then you will adjust your contracts. Many of the gold signal theorists forget that. They think each day to day move in gold is inflation and then they make them selves right retroactively by claiming what ever lag period they need to explains the eventual adjustment. As David Goldman first pointed out back in 1986, Gold Volatility is a much more important indicator that spot gold price.

    Expectations happen in the behavior of millions and millions of individual decisions where the deciders discount the future...inflation, no inflaiton, stability....I just finished a four year labor negotiation contract...two weeks ago. The union agreed to a cummulative 2% wage increase over four years and less costly health care plan...no body expects inflation.

    It is interesting to understand how the metric of leverage ratio is driven by expectation....when market participants expect future prices to rise they increase leverage ratios...which causes prices to rise...and as they see prices rise...they increase leverage ratios..both in willingness to make loans and the willingness to borrow...they give wage increases becuase they are confident they can get price increases...and in deflation leverage is reduced as the expectation is that prices will decline and the risk of default is high...so lenders want more money down and borrowers want a cushion they can get with more equity and less risky financing...the reduced leverage reduces the qualified buyers and prices actually drop with less transactions...so as prices drop lenders require more equity...these are self reinforcing.

    But the Fed fiddles with interest rates...like the reducing the price of a product you don't have will get you sales or gradually increasing the price of product in short supply will discourage buyers.

    Its counter intuitive as a policy to incrase leverage when prices are declining and to reduce leverage when they are increasing. The whole proces shows the degree to which present value is merely a expectation about the future.
     
    #47     May 5, 2010
  8. piezoe

    piezoe

    I don't believe a comparison between 1930 and today's post Bretton Woods world are valid. Well naturally any to things can be compared. What I mean is that in my view the post 1971 period is dissimilar to both the 1930 period and the Bretton Woods period (1944-1971). Hugely dissimilar.
     
    #48     May 5, 2010
  9. Inflation must be looked at through a telescope not a microscope. Minimum decades an more like larger segments of generations. Within these large segments of time there are periods where it appears we are having deflation or no inflation but if you have trouble seeing the forest for the trees then ask yourself and compare your costs of living to that of your parents and your parent's cost, to that of your gandparents. See the forest now? It's always been there but you could not see it because you were focused on the beautiful colors of the changing leaves in the fall not realizing that spring was just around the corner with a new batch more leaves in the big ol forest. Ie; more and more dollars.
     
    #49     May 5, 2010
  10. Ed Breen

    Ed Breen

    Pie I suggested that the periods have in common a unique build up of excess reserves at the central bank. I would also note that all three episodes follow a profound credit collapse that threatened the entire banking system...different from other recessions. You simply say they are not similar. Clearly no two events are exactly the same but fundamental drivers need to be addressed. You simply say they are dissimilar. Due me the courtesy of explaining what dissimilarities void the comparision with regard to the basic drivers they have in common.
     
    #50     May 6, 2010