[Samseau]

(02-04-2013 12:51 AM)T and A Man Wrote:  

(02-02-2013 11:06 PM)Samseau Wrote:  

People without jobs suffer even more hardcore in inflationary periods, because not only can they not get jobs but they also will find that their paychecks can't buy them shit.

??

They don't suffer a smuch as peole with no jobs. Purchasing power goes to zero, it doesn't apporach zero like inflation.

As I just said, it already is zero.

No, you miss the point. Unemployment is just as bad with high deflation as it is with high inflation.

The only difference is, when people DO manage to land a job in a deflationary environment, they will have a more valuable currency to spend.

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The poorest countries in the world are the ones that have high inflation.

There isn't a country with deflation that doesn't eventually recover.

I would agree with that. But I am defending poor who typically have to pay a disproprtionally large burden for deflation.

For every critique of inflation, there is an equal critique of deflation, when governments defend a privileged class.

A poor person can have a wider array of options when they have a job.

Again, the jobs thing is a misnomer - a healthy job environment has nothing to do with deflation or inflation. Excessive amounts of either will kill a job market.

Poor people do better in deflationary environments, because deflation lays the groundwork for a more healthy, and robust economy, as opposed to inflation which wastes away all assets.

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Keep reading for proof:

That's because you had a credit bubble where the banks were bailed out "in order to prevent massive deflation".

Bailouts = Massive government intervention (which is bad).

I never stated otherwise.

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Remember Iceland? Iceland went bankrupt in 2008. They decided that bailouts for banks was retarded. They defaulted on all their loans and the value of the Icelandic Krona went to shit. People were unemployed for a few years.

But after a brief dip, how are they doing today?

http://www.zerohedge.com/news/2013-01-26...ning-davos

http://www.zerohedge.com/news/2013-01-26...ning-davos

Their debts are being repaid well ahead of schedule.
Unemployment is half of what it was in 2008.
GDP growth has been higher than almost any other developed nation.
Fitch ratings have been restored to investor grade.

OK, but that's not prolonger deflation...I agree the most effective way to fix a crisis is for the standard method of repudiating debt.

Bankruptcy and default. Lenders take possession of secured assets, and then everything goes on its way again.

That's not a deflationary environment.

Yes it is, Iceland went through extreme deflation after they went bankrupt. First the bankruptcy destroys the value of the currency, which is inflationary, but in the ensuing months and years without any printing of additional currency deflation is the norm as prices fall to clearing levels.

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Europes, particularly greece, is a deflationary environment with its austerity programs.

Japan's 2 decade long death by a thousands cuts is a deflationary environment.

Cutting your losses sees one accountig period of asset price decline, then rises again.. there is a reason a reccsion has been defined as two successive accounting periods of decline.

Greece and Japan aren't deflationary, because the governments are printing mad cash to paper over bad debts. In Greece's case, it's the ECB.

These countries suffer from biflation, where some asset prices are propped through money printing, keeping the prices artificially high, in order to help special interests (i.e. banks), yet the general economy suffers deflation from the lack of currency due to widespread defaults among the general populace.

Had these countries made the right move, and let EVERYONE go broke at the same time, the reset button is pushed and prices immediately fall to market-clearing levels.

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Thus, deflation is a natural consequence of not bailing out the rich. It helps the poor in the long run, the only thing they need is some welfare to survive until the economy sorts itself out again.

You're not aligning properly debt repudiation with deflation.

Deflation is an event of a prolonged time-frame. Resetting prices with deault sees the future horizon pointing to upward prices and or production. Deflation sees the horizon of lower prices.

The best welfare you can give any person is a job.

I don't think you understand what causes deflation.

Deflation is caused from two things:

- An increase of goods/services relative to the supply of money
- Private citizens who default on their debt

Inflation is caused from two things:

- An increase of money relative to the supply of goods/services
- Public entities (such as governments) who default on their debt


Deflation does not need to be prolonged. It can happen quickly or slowly, and if it happens slowly I think the effects are good for the economy. People will have greater purchasing power and will be able to buy foreign investments quite easily.

[T and A Man]

(02-04-2013 12:08 PM)damngringo Wrote:  

Meh, this tread is full of leftist shit and overall bad understanding of macroeconomics.

Inflation is the increase in the general level of prices as opposed to increase in money supply, which is a tool of expansionary monetary policy.

I've asserted as much yes.

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CPI is a measure of inflation, essentially a sample of prices for basic goods needed for survival and well-being of an individual.

Yes, that's is explained by the 'C' in consumer price index.

But consumer items are not the only thing desired by individuals. The capital price of housing escapes this, and when you add in the Basell II guidelines and expanding money, it is no wonder most of the western world's inflation piled into housing.

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Inflation is generally asymmetric - if inflation is 5%, some prices may stay the same, while others might increase by 10%.

I would opint out that's not a really relevant point. Also the weighting of items in a CPI basket is meant to be designed proprely to compensate for this.... if you believe the blunt instrument of the overnight cash rate is the only necessary tool for this.

[quote[Inflation comes from 2 sources: wages & costs. If companies start paying more, people have larger disposable income and can spend more, increasing aggregate demand in the economy and consequently prices, which finds it reflection in measures like CPI.[/quote]

No, that's not a given, and does miss a lot of thing.

Increased wages, if not compensating for currency debasement or protecting bond holders, come about from improved productivity bringing more product to market.

Extra wages consume these extra items. That is the reason for fractional lending, which is secular to Keynesian economics.

It's only in the absence of increased productivity, ... such as when you reward bottom-feeding property developers or bailing out banks, is when we get increased money and the same amount of product.

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When costs go up, supply shifts upwards, increasing the prices and lowering the aggregate output via decrease in aggregate supply. Basic market forces in action here.

But you're not pointing out on what is the major cause of inflation regardless of money supply.

Destruction/Abandonment of production facilities.

Empirical evidence shows this when destruction happens in war time... or abandonment when incentives are given to zero value activity such as flipping houses.

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This is true that governments & central banks target inflation at around 2-3% (if interested, google central bank losses function in the scope of DSGE models). There is almost always a trade off between inflation and employment represented by Phillip's Curve (wiki it).

I would argue there is a trade off between the Phillip's curve and job security.

Full employment policies have been tried in the past. The evidence is there.

During WWII, every person was engaged in some form of economic activity, including 8% dressed in khaki and engaged in wealth destruction.

Those that returned from fighting understood Keynesian economics, because western countries could only conduct WWII with keynesian economics. At the cessation of war, they understood there didn't need to be an immediate 8% rise in unemployment. In fact they demanded their politicians maintain them.

Everyone could be doing something... and the hallmark of Keynesian economics was full employment, not printing fiat for welfare as neo-classical douches like to portray it as.

8% in the military meant 8% receiving a wage as well as 8% demanding product.

All they did was shift the 8% demand from bullets, guns, tanks, etc.. to the post WWII boom of consumer items. With everyone with jobs, there was no need for welfare, and everyone had ample opportunity to demand product with their living wage.

What compounded the wealth effects of the era was with full employment, the power dynamic of the workplace changed.

With jobs in abundance, workers can easily desire a job that meets their conditions, or they will find somewhere else that will.

Instead we now have NAIRU, where at least 4% of the population will be unemployed, even against their will. The empirical evidence is there... for every job vacancy, there are multiples of idle labour.

This pool of idle labour is always a threat to the existing workforce... if you don't accept my job conditions, I will find someone else that will.

So the rational response has occured..... labour feels threatened, conditions erode, real wages decline and job security diminishes. Oh yeah... the capital (the rich) take every increasing proportions of producivity gains.

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Re Keynesians & monetarists, it's just a fucked up outright retarded argument.

They are not the same. Monetarists, Friedman's school of Chicago, are more aligned with neo-classical, except they just target money supply increases to maintain asset prices, and ignore unemployment.

They continue to see Ricardian equivalence in unemployment, as the neo-classicals do, thinking it is people seeking increased leisure time.

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Keynes introduced his theory of boosting the economy via fiscal policy in times of gold standard (where a dollar would represent a claim for gold in Fort Knox and whatnot).

Except the gold standard in the British empire was abandonded when he wrote his theory.

He well and truely made clear his policies were designed for fiat, there is explicit calls for the increase in the money supply, which the gold standard is inherantly deflationary.

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When this system was abandoned in 1971 in Bretton Woods,

Bretton Woods was 1945.... 1971 was just the abandoment of Bretton Woods when Nixon went off the gold exchange.

The Bretton Woods system was created by Keynes, all of his proposals comprised it, except the Bancor (an extremely important part), which the U.S. vetoed.

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the currencies effectively began competing against each other and measure relative strengths of the economies. No longer tied to gold, the modern currency is fiat money, a social arrangement that you can buy this and that with the amount that you have. No longer obliged to hold enough gold, the countries began to borrow from each other, pump this money into economy (again, fiscal expansion) thus increasing national welfare (GDP & shit).

The crisis at our hands now is indeed Keynesian,

How can it be Keynesian? Keynesian policies were abandoned over 40 years ago.

That's like saying 9/11 was a Japanese attack because they did Pearl harbour.

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but not because he was an idiot, but because the game has changed. Modern economics (as an academic subject) needs to come up with a new integrated paradigm and consensus between monetary and fiscal policy and sustainable budgets.

He is far from an idiot. The idiocy in our society today comes more from useful idiots believing in trickle down.

I would subscribe economic works in the opposite direction, as a vine.... people demand product, and supplier compete against each other to supply it at either the lowest margin or highest quality. The demand, and choice, comes about from consumer being empowered by income.

Every business in history is an attempt to convince that consumer to depart witht ie rmoney, and hand it over for some utility.

They need money to hand over in the first place.

The Neo-classicals, and to a lesser extent the Austrians, have convinced a vast nuber of useful idiots... and you'll find a greater proportion of them in the individualistic U.S, and it will appeal to the narcissism of people who apply game, because they are both groups tending to think they are exceptional little snowflakes who can justly apply 'trickle down' better than most.

[T and A Man]

(02-04-2013 05:33 PM)Samseau Wrote:  

No, you miss the point. Unemployment is just as bad with high deflation as it is with high inflation.

I've never prescribed either.

I've stated that a fixed money supply is eternally deflationary.

Deflation impacts on production levels. Which impacts on employment.

That has been my point and has always been my point.

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Again, the jobs thing is a misnomer - a healthy job environment has nothing to do with deflation or inflation.

Yes it does. You can't ever have a healthy jobs market with eternal deflation, which again... a fixed money supply ensures.

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Excessive amounts of either will kill a job market.

No, all forms of deflation will kill a job market. Acute inflation does not.

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Poor people do better in deflationary environments, because deflation lays the groundwork for a more healthy, and robust economy, as opposed to inflation which wastes away all assets.

Not during the deflationary period they don't. They suffer so much hardship, such as in greece today, they are willing to vote for parties like New Dawn because they seem to ofer the oly hope is such horrible times.

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[quote]Yes it is, Iceland went through extreme deflation after they went bankrupt. First the bankruptcy destroys the value of the currency, which is inflationary, but in the ensuing months and years without any printing of additional currency deflation is the norm as prices fall to clearing levels.

No it's not. That's a crash resetting price. Default causes distressed prices because of forced sales. That is not deflation.

I descrobed deflation where the money supply is fixed, and (supposed) increased production has to portion itself amongst the same money supply.

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Greece and Japan aren't deflationary, because the governments are printing mad cash to paper over bad debts. In Greece's case, it's the ECB.

Erhh, yes they are deflationary. prices continue to sink. in most areas of the japanese economy, they have declined for 20 year. They have suffered this because they refused to accept default... and printing money does not always cause inflation. Japan being the case.

Europe also has declining prices. They are not inflationary enviroments, they again are textbook deflationary prices.

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These countries suffer from biflation, where some asset prices are propped through money printing, keeping the prices artificially high, in order to help special interests (i.e. banks), yet the general economy suffers deflation from the lack of currency due to widespread defaults among the general populace.

So asset prices stay static, and consumer items fall isn't deflation? It's now renamed biflation to avoid they evidence?

No, it is a deflationary environment, jobs are dwindling, product is dwindling and people are suffering.

That is why you do not want deflation.

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Had these countries made the right move, and let EVERYONE go broke at the same time, the reset button is pushed and prices immediately fall to market-clearing levels.

Yep, I agree with that.

And long as some form of full employment polcies were added, I have no problem with asset prices clearing, or even being forced to clear to repudiate debt levels.

But those who benefit from the amount of debt in the economy are poor, or welfare recipients, of those the prescrbe to keynesian economics.

They are the rentier.

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I don't think you understand what causes deflation.

Deflation is caused from two things:

- An increase of goods/services relative to the supply of money
- Private citizens who default on their debt

I understand what causes deflation more than most on this forum. The second point you stated does not necessary cause deflation.

The first does, I've made the my central point, and also why it is to be avoided.

That is why the gold standard should never be used.

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Inflation is caused from two things:

- An increase of money relative to the supply of goods/services
- Public entities (such as governments) who default on their debt

Government defaulting doesn't necessarily cause inflation either.

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Deflation does not need to be prolonged.

Erhh yes it does, it's the definition of deflation, when a money supply is fixed, it is eternal. Forever is quite prolonged in my eyes.

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It can happen quickly or slowly, and if it happens slowly I think the effects are good for the economy.

Which it then becomes default, not deflation. They are not the same thing.

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People will have greater purchasing power and will be able to buy foreign investments quite easily.

Why are you targetting 'foreign assets'? That's completely irrelevant at best, and alludes to rent-seeking at worst.

People can have acute inflation, and still see imcreased purchasing power... as was the hallmark of the 1945-1971 keynesian period.

[Samseau]

Let's start with the Theory because you've got some terms mixed up.

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Erhh yes it does, it's the definition of deflation, when a money supply is fixed, it is eternal. Forever is quite prolonged in my eyes.

Nope, it's the decrease of money relative to goods causing a falling in the price of goods. Speed has nothing to do with it.

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Which it then becomes default, not deflation. They are not the same thing.

Defaults cause sudden, immediate deflation. See: Great Depression. They also cause depressions because if enough people go bankrupt there will be a large segment of the population unable to spend.

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People can have acute inflation, and still see imcreased purchasing power... as was the hallmark of the 1945-1971 keynesian period.

Which you've already stated in your conversation with damngringo that money was fixed to a gold standard then. Inflation was negligible then, and there is no evidence that acute deflation wouldn't have served everyone just as good.

The 1945-1960 period was a time of unprecedented demand for American production, that was the single biggest factor in keep unemployment low and all Americans rich.

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So asset prices stay static, and consumer items fall isn't deflation? It's now renamed biflation to avoid they evidence?

Wrong, because biflation specifically refers to the propping of asset prices by a government entity such as The Fed.

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No, it is a deflationary environment, jobs are dwindling, product is dwindling and people are suffering.

Again, deflation or inflation has nothing to do with unemployment unless applied on extreme levels. On the other hand, they will affect the long-term outlook of a country because inflation kills savings while deflation increases them.

More savings = More business, more jobs, and more long-run spending.

[T and A Man]

(02-05-2013 03:24 AM)Samseau Wrote:  

Let's start with the Theory because you've got some terms mixed up.

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Erhh yes it does, it's the definition of deflation, when a money supply is fixed, it is eternal. Forever is quite prolonged in my eyes.

Nope, it's the decrease of money relative to goods causing a falling in the price of goods. Speed has nothing to do with it.

I don't have the terms mixed up at all. I have been the most consistent on this thread.

I've already pointed out that what you've said above, when I said deflation occurs with a fixed money supply. When increased number of goods come into the market whilst money supply is fixed, prices drop.

That is a relative decline. This relative decline impacts future production.

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Which it then becomes default, not deflation. They are not the same thing.

Defaults cause sudden, immediate deflation.

No they don't, you're the one who doesn't understand here.

Defaults don't necessarily alter the amount of money in supply. Defaults caused distressed sales, that means buyer may be opting to pay less, not because they are constrained by less money.

So for the 3rd time, that is why Iceland is not an deflationary environment.

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See: Great Depression.

The important part of the great depression was not the nominal defaults, but debt-deflation, whcih was what i stated in my first post.

Irving Fishers peice here is one of the most important essays in history.

It is why greater than or equal to zero inflation in extremely important. Much enterprise requires debt, and debt hates nothing more than deflation, because debt is a nominal figure. I explained this earlier as well, when talking about the margin required from a per gallon production.

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They also cause depressions because if enough people go bankrupt there will be a large segment of the population unable to spend.

They can spend as early as next week, with their next pay check.

bankruptcy repudiates debt, and means a person has no more debt obligations to pay.

Jobs are the most important part of the economy, and keynesian theory put that at number one. It favoured payment for personal exertion, not return on capital and trickle down

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People can have acute inflation, and still see imcreased purchasing power... as was the hallmark of the 1945-1971 keynesian period.

Which you've already stated in your conversation with damngringo that money was fixed to a gold standard then. Inflation was negligible then, and there is no evidence that acute deflation wouldn't have served everyone just as good.

It was greater than zero, and it was a keynesian era following keynes' theory, which was to avoid deflation at all costs.

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The 1945-1960 period was a time of unprecedented demand for American production,

demand, at all times in history, is unlimited.

There is nothing exceptional about the demand levels of that era.

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that was the single biggest factor in keep unemployment low and all Americans rich.

Thank you keynes' full employment policies, not the NAIRU policies of today that supress wages and give more to rich people.

So again, I am consistent here.

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So asset prices stay static, and consumer items fall isn't deflation? It's now renamed biflation to avoid they evidence?

Wrong, because biflation specifically refers to the propping of asset prices by a government entity such as The Fed.

I'm not confused about which vested interests are being protected by vested interests. In fact I am the one championing alone the economic policies that serve against them, for the benefit of more people.

However, those asset prices can be static for eternity. They are't impacting on consumer goods, which you state are declining.

That's deflation. If the assets are increasing in price, and being realised in certain consumer goods going up in price, then some inflation may occur... but can only be realised by increased money.

I know of your term. I just don't pay it any credence because it is erratic by those that labelled it

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No, it is a deflationary environment, jobs are dwindling, product is dwindling and people are suffering.

Again, deflation or inflation has nothing to do with unemployment unless applied on extreme levels.

No, even the smallest amount of deflation will impact on employment. Deflation always impacts on production. Any inhibition of production will impact on employment.

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On the other hand, they will affect the long-term outlook of a country because inflation kills savings while deflation increases them.

The relationship between sales and debt isn't secular.

Debt is required to make productive stuff. Deflation impairs those who require debt. I've stated this prior as well.

Again, I am consistent here, and I do not suffer from mixing terms.

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More savings = More business, more jobs, and more long-run spending.

This is some trickle down rubbish. Savings will not be used as investment in a deflationary environment.

There will be no more business, and savings will return zero, inhibiting spending for those that want to.

I think if anyone who has mixed terms up, it's your definition of what actually is deflation, it appears you've conflated it with default.

[damngringo]

T & A, not to pick up on you, you know the theory and economic history well, but that doesn't translate into systemic understanding of how it all works together. My guess is that you're a finance major with economic history minor.

Just one point, tho. Speaking of cost inflation, wealth / capital / facilities destruction and war-time issues are extreme examples (tail risk loosely defined, if you want). Most commonly and daily things like staggered contracts, rigidities and stuff like that cause costs to go up. Most importantly from what I see around is again that leftist unemployment shit. Can't sack unproductive workers because of their contracts and requirements to provide for them.

Wars (and tail risk in general) can be devastating, but they are extreme.

This whole dialogue reminds me of Black-Scholes-Merton formula, which is roughly correct when the price fluctuations are small but fails on a larger scale.

Samseau,

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Again, deflation or inflation has nothing to do with unemployment unless applied on extreme levels. On the other hand, they will affect the long-term outlook of a country because inflation kills savings while deflation increases them.

More savings = More business, more jobs, and more long-run spending.

Please read about Phillip's Curve here http://en.wikipedia.org/wiki/Phillips_curve.

Also, if I remember correctly, inflation in 1945-1971 in the US translated into greater purchasing power because of the growing productivity and capital stock in the economy. Both quality and quantity of goods increased in the period, and which boosted wage increases and thus purchasing power, despite growing prices.

[T and A Man]

(02-05-2013 07:24 AM)damngringo Wrote:  

T & A, not to pick up on you, you know the theory and economic history well, but that doesn't translate into systemic understanding of how it all works together. My guess is that you're a finance major with economic history minor.

I graduate a long time ago. In my work I do macro analysis.

Steven Keen has a seminal piece called the roaming cavaliers of credit, and it talks about how credit creation is exogenous to the system, and vastly misunderstood. I was say misunderstood by everyone else on this thread.

I can as justly make the same claim of misunderstanding here as well.

Biggest difference is what i claim works... was implemented in the past, and worked.

For starters, anyone who claims this is a keynesian flaw, when keynesian economics hasn't been practised for over 40 years, to me, shows misunderstanding.

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Just one point, tho. Speaking of cost inflation, wealth / capital / facilities destruction and war-time issues are extreme examples (tail risk loosely defined, if you want). Most commonly and daily things like staggered contracts, rigidities and stuff like that cause costs to go up.

They will only go up in the long term via an imbalance in the money supply.

Rigidities sort themselves out with production spikes/troughs.

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Most importantly from what I see around is again that leftist unemployment shit. Can't sack unproductive workers because of their contracts and requirements to provide for them.

OK, that's an IR issue. it may be implemented under the umbrella of keynesian economics, but keynesian economics does not prescribe individual employers burdening themselves with unnproductive.

Why not see how this was handled in 1955 to get an example.

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Wars (and tail risk in general) can be devastating, but they are extreme.

Wars have been an awfully common occurrence in history.

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This whole dialogue reminds me of Black-Scholes-Merton formula, which is roughly correct when the price fluctuations are small but fails on a larger scale.

So dismissing black swans.... which is what you did when dismissing war, due to our relative peaceful time, as an extreme event.

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Samseau,

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Again, deflation or inflation has nothing to do with unemployment unless applied on extreme levels. On the other hand, they will affect the long-term outlook of a country because inflation kills savings while deflation increases them.

More savings = More business, more jobs, and more long-run spending.

Please read about Phillip's Curve here http://en.wikipedia.org/wiki/Phillips_curve.

Also, if I remember correctly, inflation in 1945-1971 in the US translated into greater purchasing power because of the growing productivity and capital stock in the economy. Both quality and quantity of goods increased in the period, and which boosted wage increases and thus purchasing power, despite growing prices.

OK.... the former just describes monetary supply increasing in line with increases in chain volumes, or new product entering the market... I stated that verbatim earlier.

The latter is the means for the consumer to access the product because their wages allowed them to.

They could demand all the product producers made, because they could afford to.

It is an observable outcome of that era.

When i stated earlier that with full employment, workers could seek out a job that fitted their desired conditions, or find someone who would.

With structurally permanent idle labour, now workers have to meet employers conditions, or they will find someone who will from the idle labour pool.

Under those two scenarios, I would say wages would decrease.. rational expectation?

Well in the 60 years from the start of the keynesian period, wage earners in the u.s. used to receive around 61% of gross national income.

Now they receive around 49%. With a relative 20% pay decrease, how can they acquire the same amount of product brought to market?

Well they took on more debt.... cause guys with big mortgages don't dissent against bosses or government.

Until of course they reach their maximum debt threshold, which this time around happened to be 2007... and before that 1990... et. al.

As I stated before, I am all for debt repudiation to resolve a credit crisis, as a chartalist all I care about is price stability.

[reaper23]

the relationship between S and I is not as clear cut as basic macro theory would teach you. it also tells you that increased G should decrease I via crowding out, but that clearly is not happening right now. government spends like a maniac while interest rates couldnt be any lower as to be giving the money away to the private sector. that directly contradicts the fundamentals of classic macro theory they teach in uni.

moderate inflation doesn't necessarily destroy savings as interest rates have inflation expectations built in and thus should preserve purchasing power even if deposited in a basic savings account. i = risk free rate plus default risk plus inflation expectation

now if you keep the cash in the mattress then you might have a problem in a high inflationary period. but then again, wages tend to keep up with inflation as well.

inflation as solely a monetary problem is being disproven daily as M2 soars.

i think the biggest influence in inflation is inflation expectations. after volker, the market believes 100% that inflation will always be kept under control and thus, inflation is kept under control.

[T and A Man]

(02-05-2013 07:54 AM)reaper23 Wrote:  

the relationship between S and I is not as clear cut as basic macro theory would teach you. it also tells you that increased G should decrease I via crowding out, but that clearly is not happening right now.

Yep, to assert savings automatically equates to investment displays more of someone adhering to theory.

My previous post made mention of Steven keen, and an essay "roving cavaliers of credit". It is an essay of purely empirical evidence, and the reality defies what Austrian loons say.

Money supply is not fixed, in fact as a costless commodity, it can potentially expand to infinity. Government won't crowd out private enterprise because they aren't pursuing a limited resource.

As the empirical evidence shows, reality, not theory, banks create money exogenous to central banks, then chase up reserves later.

The Austrian solution is to ban fractional reserve lending.... when all the evidence shows we don't have fractional reserve lending.

They are giving an 'answer' to a different question.

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government spends like a maniac while interest rates couldn't be any lower as to be giving the money away to the private sector. that directly contradicts the fundamentals of classic macro theory they teach in uni.

because classical... or more pointedly, neo-classical, and monetarist theories don't work.

Keynes pointed this out with his emphasis on velocity.

The U.S. government failed because they gave to companies, believing trickle down worked. All they did was horde the money, they know the U.S. consumer can't afford any extra product, so they won't make it.

When I stated economics is like a vine that moves up, if bailout money was given to the average worker, instead of wall st, they would spend.. in fact they would demand more than what was available,,, you'd have short term inflation, then companies trying to capture market share trying to soak up this excess demand with increased productive output. That means hiring more people, and then those hired people would spend more than their unemployed benefits would allow, thus increasing more demand yet again.

Consumers would chase the businesses offering cheapest price or best quality.

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moderate inflation doesn't necessarily destroy savings as interest rates have inflation expectations built in and thus should preserve purchasing power even if deposited in a basic savings account. i = risk free rate plus default risk plus inflation expectation

Theoretically that is correct. interest rates in savings are meant to compensate for currency debasement, but I've never seen the after tax rate compensate enough in my life time

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now if you keep the cash in the mattress then you might have a problem in a high inflationary period. but then again, wages tend to keep up with inflation as well.

inflation as solely a monetary problem is being disproven daily as M2 soars.

It's two parts in QToM.

Money in circulation.... and velocity... money has zero velocity if it is not spent, i.e. being hoarded by business/banks.

To gain velocity it needs to be spent, and consumers, and no more rewarding that poor workers, who will spend much of what they earn anyway.

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i think the biggest influence in inflation is inflation expectations. after volker, the market believes 100% that inflation will always be kept under control and thus, inflation is kept under control.

No. Inflation is always a monetary problem. if there are no supply shocks, such as war or energy crises... then inflation can not physically occur without an increase in the monetary supply.

It has to be understood however, its the behaviour of whose hands the money is in that can determine the inflationary impact.

[reaper23]

^^ thats a bit of a logical stretch to say that inflation is always a monetary problem (due to increased monetary supply) but that increased monetary supplies dont always lead to inflation.

you're right though about velocity. one just needs to look at corporate balance sheets today to see what increase monetary supply does when no one is spending it.

PS: how do we NOT have fractional reserve lending? isn't that how the whole thing works?

[T and A Man]

(02-05-2013 08:32 AM)reaper23 Wrote:  

^^ thats a bit of a logical stretch to say that inflation is always a monetary problem (due to increased monetary supply) but that increased monetary supplies dont always lead to inflation.

No it's not.

Increase the money supply.

You can either get inflation or not.

Don't increase the money supply, and other than a supply shock, you can never get inflation.

What I am saying is that inflation is caused by increased money supply, but less than perfect correlation.

I will assert than ultimately it will always cause inflation. Inert money has kept the QE at bay, and the most effective way toi suppress it when starting to unleash is tax... but American's have a dogmatic view on taxes, so I would assume inflation in the future.

Quote:

you're right though about velocity. one just needs to look at corporate balance sheets today to see what increase monetary supply does when no one is spending it.

PS: how do we NOT have fractional reserve lending? isn't that how the whole thing works?

We have a close proxy.

But with fractional reserve lending, a bank is reserve constrained. it must acquire reserves first, then lend out later. That is the immutable rule of its definition.

What Keen's essay showed is that banks in the western world just lend to whatever they can, they get a clip no matter what... and the bigger the better. Once loaned, they then attempt to acquire reserves AFTER the fact. Even if they can't get it from the private sector, central banks will then create it for them.

This is observed evidence.

What this then says is that they are not reserve constrained, but in reality they are capital constrained. ow can you try and reform reserve banking when reserve constraints aren't relevant?

That's Austrians for you. Austrians don't do facts.

They do myth, then pat themselves on the back in their echo chambers telling themselves how awesome they are.

Back on track, when you look at capital classes under Basel II, namely the rating given to residential property, you'll see why they blew up a property bubble.

So if you need to understand how it works, then you have to get away from the 'we use fractional reserve lending, and it's a problem' paradigm.

Scrap it and start again.. if you need to read that Keen essay. It's free on his blog.

[damngringo]

Can you give the title of the essay please? Sounds interesting.

I can't say I agree with you all the time, but as you work in macro analysis, you might be better informed.

Also regarding wars, modern macro (and specifically researches of crisis) focus on the Western world, where there has been no war since 1945 (think Germany, US, UK, etc.). They wage wars abroad pumping a lot of money in their economies, but at the same time they do not experience the devastating effects of wars domestically.

[reaper23]

that is true what you say. make loans first then scramble for reserves. and if you need more then go to the "window" and borrow at the over night rate. but at the end of the day (literally) the books show that the banks are loaning a fraction of their reserves, even if they just borrow the reserves over night.

true or false?

[T and A Man]

(02-05-2013 08:58 AM)damngringo Wrote:  

Can you give the title of the essay please? Sounds interesting.

I can't say I agree with you all the time, but as you work in macro analysis, you might be better informed.

Also regarding wars, modern macro (and specifically researches of crisis) focus on the Western world, where there has been no war since 1945 (think Germany, US, UK, etc.). They wage wars abroad pumping a lot of money in their economies, but at the same time they do not experience the devastating effects of wars domestically.

The Roving Cavaliers of credit.

http://www.debtdeflation.com/blogs/2009/...sofcredit/

[T and A Man]

(02-05-2013 09:01 AM)reaper23 Wrote:  

that is true what you say. make loans first then scramble for reserves. and if you need more then go to the "window" and borrow at the over night rate. but at the end of the day (literally) the books show that the banks are loaning a fraction of their reserves, even if they just borrow the reserves over night.

true or false?

That's not really the definition of fractional lending.

Fractional lending means they keep a fraction of what they have lent.

That is why there can be $100 in supply, but $900 worth of debt.

What that means is if I walk into a bank and deposit $100, they then can write up a $1,000 loan to the next person walking through the door... with my $100 being the fraction that covers it.

What happens in reality is that anyone walking in the door seeking a loan, can get one. If they borrow $1,000, the bank then has to seek $100 after the fact to even up the books.

As I said, the guy walking in the door, look for a $1,000 to borrow from the banks reserves.... is NEVER constrained. They can make it up.

Giving him a $1,000 is as easy as writing a .pdf

Ever see the M3 figures leading up to the GFC?

That's a lot of .pdf's.... they didn't show up in inflation because housing prices aren't part of the the CPI. That's where the inflation escaped in to.

[reaper23]

yes, i meant a multiple of the reserves, not a fraction

[BIGINJAPAN]

Don't forget guys when talking about inflation everyone seems to forget that US is the RESERVE currency of the world.

A couple big benefits come with that. The big one being you export all your inflation. If that was not the case, the chickens would be coming home to roost already. As much as prices have continued to go up during this depression you ain't seen nothing yet.

Don't forget why some of these regimes being toppled happened in the first place. It wasn't because the people were necessarily sick of their leaders, but that the food prices had doubled in those countries.

But I think we are only a few short years away until all those cheques the US government has written will be cashed and americans will be out bid for everything on their own soil

[BIGINJAPAN]

One place you can't export inflation to other nations is the higher learning complex. Costs of going to school are soaring. Unless you pay in gold grams.

http://pricedingold.com/college-tuition/

[Dvorak]

(01-31-2013 08:53 PM)T and A Man Wrote:  

(01-31-2013 04:43 PM)Dvorak Wrote:  

I never really understood the structure of the ECB / FED.

From what I understand they're actually owned by the banks.

So if they're just printing money and buying stocks/bonds, aren't the banks just making themselves richer? Why does the state give them this power?

Because by itself, sitting inert, cash has no value.

The purpose of inflation, theoretically, is to maintain price stability in line with increase of chain volumes.

If an economy is 100 apples, and there is $100 in circulation, then logically you'd say each apple was $1 each.

Productivity enhances see the next year produce 125 apples. If the money supply stayed constant, you'd see apples priced at $0.80.

in otherwords 20% deflation.

To maintain price stability, 25 futher dollars are added, to increase the money supply to $125. Apples stay $1 each.. no inflation.

Likewise, print and extra $150, $250 in supply... apples become $2 each, or 100% inflation.

These nominally non-government bodies perform the task because it was was to keep it independent of government, who can obviously distort money supply to offer favour to the electorate.

Nothing demonstrates this when excess cash leaked into housing prices across the western world, making the electorate 'feel' richer.

I understand that they want a steady state of inflation.

I just don't really understand what happens with the money the banks are printing. They get to keep it for themselves?

I know they invest in the economy (buying bonds and stocks). I just don't get who "owns" the freshly printed money, or why they "deserve" to own it.

[j r]

(02-14-2013 03:51 PM)Dvorak Wrote:  

(01-31-2013 08:53 PM)T and A Man Wrote:  

(01-31-2013 04:43 PM)Dvorak Wrote:  

I never really understood the structure of the ECB / FED.

From what I understand they're actually owned by the banks.

So if they're just printing money and buying stocks/bonds, aren't the banks just making themselves richer? Why does the state give them this power?

Because by itself, sitting inert, cash has no value.

The purpose of inflation, theoretically, is to maintain price stability in line with increase of chain volumes.

If an economy is 100 apples, and there is $100 in circulation, then logically you'd say each apple was $1 each.

Productivity enhances see the next year produce 125 apples. If the money supply stayed constant, you'd see apples priced at $0.80.

in otherwords 20% deflation.

To maintain price stability, 25 futher dollars are added, to increase the money supply to $125. Apples stay $1 each.. no inflation.

Likewise, print and extra $150, $250 in supply... apples become $2 each, or 100% inflation.

These nominally non-government bodies perform the task because it was was to keep it independent of government, who can obviously distort money supply to offer favour to the electorate.

Nothing demonstrates this when excess cash leaked into housing prices across the western world, making the electorate 'feel' richer.

I understand that they want a steady state of inflation.

I just don't really understand what happens with the money the banks are printing. They get to keep it for themselves?

I know they invest in the economy (buying bonds and stocks). I just don't get who "owns" the freshly printed money, or why they "deserve" to own it.

Here's the best way to think about it: the Federal Reserve is the government's bank. When the Treasury Department prints bills, they deposit them at the bank. The Fed doesn't "own" the money any more than your bank owns your paycheck. These just keep it for you, give you cash when you want it, and pay your bills through electronic transfer.

[T and A Man]

(02-14-2013 03:51 PM)Dvorak Wrote:  

(01-31-2013 08:53 PM)T and A Man Wrote:  

(01-31-2013 04:43 PM)Dvorak Wrote:  

I never really understood the structure of the ECB / FED.

From what I understand they're actually owned by the banks.

So if they're just printing money and buying stocks/bonds, aren't the banks just making themselves richer? Why does the state give them this power?

Because by itself, sitting inert, cash has no value.

The purpose of inflation, theoretically, is to maintain price stability in line with increase of chain volumes.

If an economy is 100 apples, and there is $100 in circulation, then logically you'd say each apple was $1 each.

Productivity enhances see the next year produce 125 apples. If the money supply stayed constant, you'd see apples priced at $0.80.

in otherwords 20% deflation.

To maintain price stability, 25 futher dollars are added, to increase the money supply to $125. Apples stay $1 each.. no inflation.

Likewise, print and extra $150, $250 in supply... apples become $2 each, or 100% inflation.

These nominally non-government bodies perform the task because it was was to keep it independent of government, who can obviously distort money supply to offer favour to the electorate.

Nothing demonstrates this when excess cash leaked into housing prices across the western world, making the electorate 'feel' richer.

I understand that they want a steady state of inflation.

I just don't really understand what happens with the money the banks are printing. They get to keep it for themselves?

I know they invest in the economy (buying bonds and stocks). I just don't get who "owns" the freshly printed money, or why they "deserve" to own it.

Well the banks can't print money on no basis, they are still capital constrained.

The reason for expanding the money supply is as I said, to avoid deflation. I think I've made the comparison before...

An economy with 100 apples and 4100 in circulation means apples are $1 each.

If apple production expands to 125, apples become $0.80 each, and that's deflation. So increasing the money supply to $125 has them remain at $1 each.

In our modern society, where we believe the private sector does better, we privatise much of the role of money expansaion, and we tend to front load it.

So in practice, a bank lends $25 to a guy who will grow a new apple tree, and that apple tree will produce the extra 25 apples.

Whilst the producer is paying back his loan, the apple tree sits on the books of the bank as security, and that is the purpose of default. The new producer keeps the apple tree, or if default occurs the bank acquires the apple tree and repudiates the debt, and everything resets to zero.

Thus, thus bankers sole purpose in life in to ensure everything is priced correctly, so a bank shouldn't lend out $85 for the tree that produces 25 apples at $1 each. A modern day example, they should lend money that allows excess bidding on houses and causes a housing bubble.

As well as they should assess risk. namely the creditworthiness of the borrower, namely if they have the capacity to pay it back. A borrower is not meant to assess their own creditworthiness, otherwise they can pick up whatever they want and leave an IOU. This is the bankers job, otherwise they are effectively doing nothing.....

yet some useful idiots will still defend them, and blame the poor Mexican fruit picker on $14,000 a year for 'not taking responsiblity' for the $600,000 the bank lent them'.....

A bank can't just create money for themselves, they have capital constraints. They create the money namely to be offset by a new asset being purchased. So on their accounting ledger they have the loan on one side, and the prmoise of future loan repayments in another, with the asset itself as security in case of default.

But to summarise again, modern banking with fractional lending, is essentially the privatised function of increasing the money supply, because apparently they do a better job than government.

[ElJefe]

The way it's working now is through open-market operations.

The Fed is buying up assets on the bond market (mortage securities), flushing cash into the banks, the banks sell the mortgage securities at prices higher than what they could get for them elsewhere. So the return the Fed is earning is low. It's like your Mom offering to buy some of your used shit for some kind of inflated price better than you could get on Craigslist.

Anyways, the way the FED pays for this spending spree is by printing money. The money however is not "printed", it's just an electronic transfer. They could type any number they wanted into an excel spreadsheet. It's completely made-up money - out of thin air, and doesn't represent any kind of real economic production. That's why the chinese are quietly beginning to unload their dollar reserves. People still think the dollar is worth a dollar because it's been that way for so long, but as confidence in the dollar declines, which is slowly happening, the demand for dollars will fall, and the Fed will have to print even more fantasy money to keep effective interest rates low.

The Fed now has mortgage securities as assets, for which it will earn some kind of return. The banks now have cash from selling the assets. Right now it seems they're using that money to invest in the stock market. Little of that money is trickling down to new loans to business start-ups, because overall confidence in the economy is low, again because everyone who would create this economic growth, ie. people with half a brain, can see how fucked we truly are.

The point is... it's a huge cover up for fucked up fiscal policies and spending practices by the US government. All the Fed is doing is postponing the inevitable crash of US government. It's like paying the alcoholic's bills for him, hoping he won't go binge drinking again the next day. Of course, by re-electing Obama, Americans have voted for more binge drinking and therefore, more debt, more hangover, etc. etc.

[BIGINJAPAN]

Funny enough all the new money being printed isn't going to US banks at all. US banks cash on the balance sheet has shrunk in the past couple months.

The US taxpayer is footing the bill for European banks. All the new cash up to the dollar is showing up on European banks that have a subsidiary branch on US soil.

http://www.zerohedge.com/news/2013-02-02...ut-vehicle

http://www.zerohedge.com/news/2013-02-09...past-month

This is part of the reason why there isn't a full blown currency crisis in the US with all the money printing. By exporting the inflation it buys more time for the USD